Canada Stocks Drop as U.S. Debt Deadlock Raises Default Concern

Canadian stocks fell to a five-week low as base metal producers retreated amid growing concern that a deadlock among U.S. lawmakers over the debt limit could lead to a government default.

Teck Resources Ltd. and First Quantum Minerals Ltd. dropped at least 2.2 percent as raw-materials producers plunged to a two-month low. Manitoba Telecom Services Inc. (MBT) sank 8.5 percent after the Canadian government rejected the proposed sale of its Allstream unit. Saputo Inc., Canada’s largest dairy processor, jumped to a four-month high after agreeing to buy an Australian cheese producer.

The Standard & Poor’s/TSX Composite Index (SPTSX) fell 95.84 points, or 0.8 percent, to 12,692.41 at 4 p.m. in Toronto, the lowest close since Aug. 30. Trading volume was in line with the 30-day average.

“The market is nervous about how entrenched the positions seem to be on both sides of the aisle,” said Matt Skipp, chief investment officer with Sw8 Asset Management Inc. in Toronto. The firm manages about C$54 million ($52 million). “The irony is, it’s the market sell-off that generally gets Congress moving in the right direction. There’s always a moment of truth when the market starts to fear the excessive rhetoric being flung back and forth.”

U.S. President Barack Obama said the nation’s economy risks a “very deep recession” if Congress doesn’t raise the $16.7 trillion debt ceiling. Senate Majority Leader Harry Reid said the Republican-controlled House should vote to end the shutdown and drop demands to change the 2010 Affordable Care Act. House Speaker John Boehner said Reid and Obama should negotiate.

The U.S. government has been partially shut down since Oct. 1 and could default on its debt if lawmakers fail to reach an agreement to raise the borrowing limit by Oct. 17.

Devastate Markets

Economists say failure by the world’s largest borrower to pay its debt will devastate stock markets from Brazil to Zurich and throw the U.S. and world economies into a recession that probably would become a depression.

U.S. equities retreated 1.2 percent, giving the S&P 500 the biggest two-day decline since June.

Eight of 10 groups in the Canadian benchmark equity gauge dropped, led by a 2.6 percent decline among health-care stocks. Valeant Pharmaceuticals International Inc. lost 3.6 percent to C$109.80 for a third day of declines.

An S&P/TSX index of raw-materials producers plunged 2.4 percent to the lowest since Aug. 7. Fifty-four of the gauge’s 56 members fell.

Mining Shares

Teck Resources, Canada’s largest diversified miner, lost 2.8 percent to C$26.56 and First Quantum retreated 2.2 percent to C$17.55 as copper futures dropped for a second day on concern demand will slow in the U.S.

OceanaGold Corp. slumped 7.3 percent to C$1.40 after agreeing to acquire Pacific Rim Mining Corp. in a deal valued at C$10.2 million.

Manitoba Telecom plunged 8.5 percent to C$29.62, the biggest slide in three years and the most in the S&P/TSX. The Canadian government rejected the company’s planned sale of its Allstream fiber-optic network division to an investment firm co-founded by Egyptian billionaire Naguib Sawiris.

Wireless Policy

The decision raises questions about Canadian ownership policy in the wireless industry. Prime Minister Stephen Harper’s government has been trying to encourage competition in the nation’s wireless sector, while stepping up scrutiny of foreign investments.

Manitoba competitors, including Rogers Communications Inc., BCE Inc. and Telus Corp., advanced at least 0.2 percent to lift an index of phone stocks to the second-best performance in the S&P/TSX.

Saputo jumped 4.1 percent to C$51.50, the highest since May 30. The cheesemaker has agreed to pay about C$378 million for Warrnambool Cheese & Butter Factory Co., an Australian producer, topping a rejected bid from Bega Cheese Ltd.

The deal will allow Saputo to target rising demand in Asia for dairy products, Chief Executive Officer Lino Saputo said.

To contact the reporter on this story: Eric Lam in Toronto at elam87@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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