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Nasty stock tumble prompts more talk of QE3

Traders at the New York Stock Exchange

Richard Drew

The old market adage of selling in May and going away seems to apply equally well to the first trading session in June, with bourses around the world experiencing a nasty tumble due to signs global growth is moving into low gear. And that's sparked more speculation that central bank intervention may be on the way.

Around midday, Toronto stocks were holding a triple-digit loss of 138 points or 1.2 per cent, despite a sharp rise in the gold sector. The Dow Jones Industrial Average in New York sagged 222 points, or 1.8 per cent, wiping out all of the gains so far this year and leaving it flat since January. International losses were even larger with the DAX in Germany off 3.6 per cent and French stocks down an average of 2.4 per cent.

Meanwhile, gold powered higher by $54 (U.S.) an ounce to $1,614, while yields on super safe 10-year U.S. Treasury notes dropped below the 1.5 per cent level for the first time, a sign of the intensity of the risk off trade. Other than precious metals, commodities were weaker, with oil off $3.29 to $83.24 a barrel.

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Driving the markets were reports from the U.S., China, Europe and Canada suggesting growth is slowing rapidly.

Economic news out of the United States was dismal, with non-farm payrolls in May rising by only 69,000, less than half of the 150,000 increase expected, while the unemployment rate ticked up to 8.2 per cent from 8.1 per cent, surprising analysts who had expected the figure to be unchanged. In both Europe and China, purchasing managers' indexes weakened, while Canadian first-quarter GDP data indicated a marked slowing in the economy during March.

Among stocks in the spotlight, shares of gold producers surged in Toronto in response to the higher bullion price, with Iamgold leading the pack, up 8.4 per cent, but Barrick rose 6.6 per cent and Goldcorp 3.4 per cent. Among the losers, Sun Life dropped 5.7 per cent. Declining interest rates and stock markets undermine the profitability of life insurers by reducing their investment income.

Despite the sharp stock market declines, there may be some relief on the way next week. Federal Reserve Board chairman Ben Bernanke is giving congressional testimony Thursday, and markets will be watching for any clues suggesting more money printing, known formally as quantitative easing, is on the way. If the central banker hints at a looser monetary policy, stocks could snap back.

"With global economies struggling for a foothold, one has to imagine that central bank intervention must occur; whether this occurs before or after the Greek elections remains to be seen," said Brenda Kelly, senior market strategist at CMC Markets in the UK.

Others were more cautious about additional easing.

"We still don't think it is the near certainty some commentators seem to believe. Nevertheless, it does now appear that the global slowdown and events in Europe in particular are beginning to have a more marked impact on the US economy. And given the uncertainty surrounding exactly how events in Europe will play out, we certainly wouldn't rule out QE3 if conditions continue to deteriorate," said Paul Ashworth of Capital Economic, in a note to clients.

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