Canada Stocks Resume Slump as Manulife, Royal Bank Plunge

By John Kipphoff

Oct. 9 (Bloomberg) -- Canadian stocks resumed their slump and fell to the lowest since May 2005, led by insurers and banks, on speculation yesterday's coordinated interest rate cuts by the world's central banks won't be enough to revive lending.

Manulife Financial Corp. dropped the most ever after XL Capital Ltd., a Bermuda-based business insurer, plunged in New York on concern that investment losses will cut profit. Insurers and banks with asset management operations were also hurt as investors pulled a record $72 billion from U.S.-managed stock and bond mutual funds in September, seeking the safety of government-insured bank deposits as the financial crisis worsened.

EnCana Corp. led a decline in energy shares, on concern that higher prices and slower growth will curb demand.``It's not working,'' said Chyanne Fickes, who helps manage about $800 million at Stone Asset Management in Toronto. ``Lower borrowing costs are not being passed on. We're clearly starting to see demand destruction.''

The Standard & Poor's/TSX Composite Index fell 4.5 percent to 9,600.18 in Toronto, after climbing as much as 3.3 percent earlier today. The S&P/TSX has slid 36 percent from its June 18 record on concern that U.S. and European bank failures and the resulting global credit crunch will trigger a recession, curbing demand for Canada's exports.

Coordinated Action

Canadian stocks rallied yesterday the first time in October as gold surged and the Bank of Canada joined the U.S. Federal Reserve and European central banks in a half percentage-point cut of borrowing costs.

Manulife Financial, Canada's biggest insurance company, dropped a record 11 percent to C$30.24, the most since it demutualized in 1999. Sun Life Financial Inc., the third- largest, fell 14 percent to C$27.55, the most since it began trading 8 ½ years ago.

XL plummeted 54 percent in U.S. trading, leading North American insurers lower. XL was removed from Goldman Sachs Group Inc.'s ``conviction buy'' list yesterday on ``concern regarding the quality of XL's investment portfolio.''

Shareholders took $43.5 billion from U.S. stock funds last month and $28.8 billion from bond funds, according to data compiled by TrimTabs Investment Research in Sausalito, California. The exodus continued in the first week of October, with an additional $49.3 billion of outflows.

The end to a ban on short-selling of financial stocks in U.S. and Canadian markets also weighed on banks and insurers, Fickes said.

Biggest Lender

Royal Bank of Canada, the country's biggest lender by assets, slid 9 percent to C$41.40, the most since at least 1983. Toronto-Dominion Bank dropped 6.4 percent to C$52.50.

Bank of Nova Scotia fell 7.2 percent to C$41.31 on concern that it may be trying to buy tarnished U.S. assets. Canada's third-largest lender is among suitors talking to National City Corp. about a possible purchase of the Cleveland-based regional bank, the Wall Street Journal reported, citing people familiar with the matter. Officials at National City declined to comment, while Bank of Nova Scotia couldn't be reached, the Journal said.

Canadian Finance Minister Jim Flaherty said he's concerned that the country's commercial banks failed to match the Bank of Canada's rate cut yesterday, undermining the central bank's ability to revive the economy. Canada's six main banks yesterday lowered their prime lending rate a quarter percentage point, falling short of the central bank's emergency half-point cut.

``The Bank of Canada is not getting any cooperation from the banks,'' said Doug Davis, president of Davis-Rea Ltd., which manages C$475 million in Toronto. ``People are still afraid to lend.''

Biggest Group

A measure of financial shares, the biggest by value among 10 industries in the S&P/TSX, dropped 7.6 percent today, the most since at least 1987.

Crude oil fell to an 11-month low as concern that fuel demand will drop if a global recession develops outweighed signs that OPEC may curb output. U.S. fuel demand during the past four weeks was the lowest since June 1999, according to an Energy Department report yesterday.

EnCana Corp., Canada's largest energy company by market value, slid 4.4 percent to C$49.89, the lowest since October 2006. Canadian Natural Resources Ltd. slid 7.4 percent to C$52.81. Suncor Energy Inc., the second-largest oil-sands miner, fell 5.8 percent to C$27.76.

Research In Motion Ltd. rose 5.4 percent to C$67.65 after International Business Machines Corp.'s better-than-expected earnings and forecast tempered investor gloom about prospects for technology spending. Research In Motion was also reiterated ``buy'' at Merrill Lynch & Co. on new products. The BlackBerry Storm, a touch-screen handset, will go on sale next month, RIM and Vodafone Group Plc said yesterday.

To contact the reporter on this story: John Kipphoff in Montreal at jkipphoff@bloomberg.net.