TSX, Dow plunge on worries about U.S. rate hike

Stock markets in Toronto and New York plunged Tuesday and the Canadian dollar slipped below 79 cents amid worries that U.S. interest rates may rise.

Toronto’s S&P/TSX index was down 211 points or 1.4 per cent at 14,642 by the close of trading.

Meanwhile, the Canadian dollar closed at 78.85 US cents, down nearly half a cent, as the U.S. currency gained strength against many currencies.

The pessimism was based on worries over when the U.S. Federal Reserve would move soon to raise interest rates.

Those good signs for the U.S. economy signal to investors that the Fed might move earlier than anticipated to raise rates, despite assurances from Fed chair Janet Yellen that she could be patient on rate hikes.

"It's all about the messaging," said Brian Belski, chief investment strategist at BMO Capital Markets.

A 'big sea change'

"The (Fed) has declared they're going to be data dependent and I think what's happening is they're worried about the potential of the reaction of the stock market. The prevailing trend in the last 15 years has been lower rates, quantitative easing, a lower U.S dollar — it's a pretty big sea change."

Adding to the worry was a comment by Dallas Federal Reserve Bank president Richard Fisher that policymakers should move sooner and slower on rates rather than later and faster.

“I think it all centred around what happened Friday with very strong job growth. It led many people to have a series of interest rate increases, not in September, maybe June," said Ian Nakamoto, director of research with MacDougall, MacDougall & MacTier Inc.

Nakomoto believes today's sharp drop is a blip.

"We’ve had a pretty strong rally until the middle of February. I think this is a normal correction in an upward market," he said.

The U.S. dollar moved up against most currencies, including the euro and the Canadian dollar.

Loonie suffers from low oil 

The loonie was pressured by the perception that Canadian rates could move lower, while U.S. rates get set to rise.

It also bore the impact of lower energy prices, with West Texas Intermediate crude oil down $1.71 to $48.29 US a barrel.

Oil fell in anticipation of the U.S. energy data release on Thursday, which could show increased stockpiles of crude.

The Canadian energy sector and mining sector were both in decline on the Toronto market.

The financial sector followed, on perception that banks could be hurt by the downturn at Canadian energy companies.

Also weighing on markets were the ongoing bailout talks between Greece and its European creditors, which seem to be making little progress.