TSX dragged down as recession fears trump rising rate cut bets

By Promit Mukherjee and Nikhil Sharma

(Reuters) -Canada's main stock index posted a sharp fall on Friday, ending this week's rally as fears that the country might enter a recession overshadowed lackluster U.S. and Canada jobs data that advanced and firmed rate cut hopes.

The Toronto Stock Exchange's S&P/TSX composite index ended down 0.77% to 22,072.21 points, and closed at almost the same level seen a month ago.

The index had edged up to a near five-week high on Thursday driven by resource companies, pretty much the same basket of stocks that drove the index down in the day.

"The market might be interpreting that as the chances of a recession are higher here in Canada, the chances of a soft landing are lower," said Josh Sheluk, chief investment officer at Verecan Capital Management.

Usually resources companies - mining and materials - react positively to rate cut bets, which gained traction after data from U.S. showed that unemployment rate high a two and a half year high of 4.1%.

Markets are pricing in a 75.2% chance of a September rate by the Fed. [0#FEDWATCH]

The data also coincided with Canadian labor force survey report which said that the jobless rate in the country jumped to a 29-month high of 6.4%.

"Weaker economy generally means weaker environment for those more cyclical businesses... that's the reaction that you're seeing in those resource exploration and commodity-based companies," Sheluk said, about the u-turn in the shares of commodity-based companies.

While the Canadian data triggered markets to advance bets for a 25 basis point cut by the Bank of Canada in July to 60% from 40% on Thursday, economists warned that a consistent rise in jobless numbers could be hinting at recessionary fears.[0#BOCWATCH]

"A sustained deterioration is typically only seen during recessions," Doug Porter, chief economist at BMO Capital Markets, wrote in a note, pointing to the 1.4-percentage-point rise in Canada's jobless rate since January last year.

The weakness in the U.S. jobs market boosted the tech-heavy Nasdaq and benchmark S&P 500 indexes with most mega cap stocks hitting all-time highs during the day.

In north of its border, it was the gold mining shares in Canadian companies that tried to offer support to the composite index with shares in OceanaGold Corp, Calibre Mining Corp and Equinox Gold Corp all rising by more than 5%.

These were largely driven up by a rise in gold prices which extended gains on Friday to their highest level in over a month.

The yield on the Canadian 10-year benchmark bond fell over 10 basis points to 3.5%, mirroring declines in its U.S. counterpart.

In corporate news, Teck Resources' shares rose by almost a percent after the Canadian government approved Switzerland-based miner Glencore's $6.93 billion takeover of its steelmaking coal unit with strict conditions to preserve jobs.

(Reporting by Promit Mukherjee in Ottawa and Nikhil Sharma in Bengaluru; Editing by Shreya Biswas and Alistair Bell)