Markets plunge after Greece stuns investors with referendum plan

The Toronto stock market fell more than two per cent Tuesday after Greece’s decision to hold a referendum on its latest rescue package stunned investors and sent shockwaves of uncertainty through global markets.

The S&P/TSX composite index closed well off the worst levels of the day, coming back from a 338-point plunge to finish the session down 136.95 points to 12,115.1 amid a solid gain in the gold sector. The junior TSX Venture Exchange fell 26.02 points to 1,588.88.

The Canadian dollar also got caught up in worries the Greek government could lose the vote, which is expected early next year. The loonie was off the worst levels of the morning but still down 1.69 cents to 98.64 cents US as traders piled into the safe haven status of the U.S. dollar.

If the vote does go against the bailout, Europe could face a messy and disorderly debt default and Greece could end up pulling out of the euro as a currency.

U.S. markets closed around its worst levels of the day, as the Dow industrials fell 297.05 points at 11,657.96, the Nasdaq was off 77.45 points at 2,606.96 and the S&P 500 index dropped 35.02 points to 1,218.28.

The announcement of the referendum late Monday by Greek prime minister George Papandreou came just days after European officials outlined a plan to deal with the fact that Greece cannot pay its debts on time.

The three-pronged strategy involved boosting a bailout fund, getting private creditors to take a bigger hit on their Greek debt holdings and forcing banks to raise more capital. Market optimism about the plan had already started to wear thin Monday as analysts looked for more specific details on how the plan would work.

The TSX was under particular pressure from the resource sector as the higher U.S. dollar and worsening demand prospects sent commodity prices lower.

A stronger greenback usually helps depress commodity prices, which are denominated in U.S. dollars, as it makes oil and metals more expensive for holders of other currencies.

Risk appetite was further dulled by data showing weaker than expected manufacturing growth in China as a government industry group reporting the slowest growth in nearly three years.

The China Federation of Logistics and Purchasing said Tuesday that its monthly purchasing managers index fell an unexpectedly large 0.8 percentage point to 50.4, just above the 50-level that signifies expansion. It forecast the economy would continue to slow in the last months of the year.

China’s huge appetite for commodities has driven prices for oil and copper sharply higher and also supported the resource heavy TSX. Its growth is seen as critical in supporting a fragile global economic recovery.

There was also a sign of slowing expansion in the U.S. manufacturing sector. The Institute for Supply Management’s index for October came in at 50.8, down from 51.6 in September and worse than the 52.2 reading that markets had expected.

Earlier in Asia, stocks fell sharply as Japan’s Nikkei 225 index retreated 1.7 per cent, Hong Kong’s Hang Seng lost 2.5 per cent and Australia’s S&P/ASX 200 shed 1.5 per cent.

China’s Shanghai Composite Index added 0.1 per cent.

European indexes retreated with London’s FTSE 100 index down 2.69 per cent, Frankfurt’s DAX fell back 4.68 per cent and the Paris CAC 40 lost 4.61 per cent.