Toronto stock market to head sharply lower as U.S. government shutdown looms

ORONTO – The Toronto stock market was set for a sharply lower session Monday as the clocked ticked toward a probable partial shutdown of the U.S. government, while traders took in major dealmaking in the resource sector.

Pacific Rubiales Energy Corp. (TSX: PRE) intends to buy Calgary-based oil and gas company Petrominerales (TSX:PMG) in a proposed deal worth roughly $1.6-billion.

Petrominerales shareholders would be paid $11 per share plus they’ll get one share of a new Brazil-focused exploration and production company called ExploreCo that will be based in Calgary. Petrominerales closed Friday at $7.74 on the TSX.

The Canadian dollar slipped 0.03 of a cent to 97.03 cents US.

U.S. futures were sharply lower as it looked increasingly likely that lawmakers won’t be able to agree on a compromise budget deal, setting the stage for a removal of non-essential government services starting at midnight.

The Dow Jones industrial futures tumbled 122 points to 15,073, the Nasdaq futures fell 23.5 points to 3,199.5 and the S&P 500 futures dropped 14.25 points to 1,672.25 as investors assessed the damage that could result from such a shutdown.

“The economy will suffer,” said BMO Capital Markets senior economist Michael Gregory.

“According to some studies, each couple weeks of shutdown will reduce real GDP growth by 0.3 percentage points.”

On top of that, an even more worrisome deadline comes up Oct. 17. That is when the U.S. government hits its debt limit and will begin running out of cash to pay its bills.

“Although it’s unclear what the net effect will be, technical default still looms unless the debt limit is lifted,” added Gregory.

Traders were also focused on Italy where Premier Enrico Letta faces a confidence vote on Wednesday after ministers from former premier Silvio Berlusconi’s centre-right bloc pulled out of the five-month-old government. Though Italy hasn’t needed a financial bailout like other countries that use the euro, such as Greece and Portugal, it has high debts that have compelled successive governments to instigate wide-ranging economic reforms.

Unsurprisingly, Milan’s stock exchange was faring worst, trading down 1.6 per cent. And in another sign of investor unease, the yield on Italy’s benchmark 10-year government bond was up nine basis points to 4.65 per cent, marking the highest level in three months.

It is also a big week for economic news, culminating Friday with the scheduled release of the U.S. government’s employment report for September.

However, a U.S. government shutdown would incidentally cause the postponement of the payrolls release, providing markets with a further uncertainty in the run-up to the next policy meeting of the Federal Reserve.

In other corporate news, Canadian Natural Resources Ltd. (TSX:CNQ) has selected a subsidiary of France’s Total SA to be its 50-50 partner for a South African offshore exploration program. CNQ will receive an undisclosed amount of upfront cash, recover costs it has incurred so far and share the cost of the first exploration well, which is to be drilled next year.

Worries about the economic impact of a U.S. government shutdown punished oil prices and the November crude contract on the New York Mercantile Exchange fell $1.23 to US$101.64 a barrel.

December copper was unchanged at US$3.33 a pound while December bullion declined $2.50 to US$1,336.70 an ounce.

Prices also declined in the wake of data showing that Chinese manufacturing activity ticked up more slowly than expected in September.

A survey by HSBC Corp. showed that manufacturing activity expanded marginally this month, rising to 50.2 from August’s 50.1. But it surprised analysts by coming in much lower than the 51.2 in a preliminary version earlier this month.

HSBC said the reading was still positive because although it expanded only slightly, it showed further improvement from July, when the index hit an 11-month low.

European bourses also fell back as London’s FTSE 100 index lost 0.84 per cent, Frankfurt’s DAX fell 1.04 per cent while the Paris CAC 40 was down 1.4 per cent.

Earlier in Asia, Tokyo’s benchmark Nikkei index lost 2.06 per cent, South Korea’s Kospi fell 0.7 per cent while the Hang Seng index shed 1.2 per cent.

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