Source: The Canadian Press

The tone on stock markets is expected to be grim this week after investors were reminded in stark terms on Friday that the European debt crisis is spreading and U.S. job creation is still woefully weak.

Worries about the pace of a global economic rebound will continue to depress the TSX energy and base metals sectors, both of which are down sharply from highs registered in April.

Financials will feel the pressure of investors worries about whether the European banking system can withstand big writedowns connected to sovereign debt.

At the least, investors were hoping that a strong U.S. jobs report would deflect worry away from the European debt crisis, which has depressed markets for weeks.

The debt crisis that started with Greece has morphed into worries about the effect of massive sending cuts by heavily indebted countries on global economic growth — and concerns about whether the euro itself can survive.

But as it turned out, the U.S. Labour Department reported that 430,000 jobs were created last month versus the 517,000 that analysts had expected. But most of the jobs added were for the 2010 U.S. census and private sector job creation came in at only 41,000.

“It’s almost as if the worst fears of the market were realized, at least in this one report,” said Richard Sparks, senior equities analyst at Schaeffer’s Investment Research.

European angst headed higher after a spokesman for Hungary’s Prime Minister said the nation’s economy is in a “grave situation.”

North American markets finished lower for the week, with the TSX down 0.87% and the Dow industrials fell 2%.

The TSX depends heavily on gold, energy and mining companies for its direction and a bearish sentiment on commodities usually hurts the market.

A runup in commodity prices last year helped the TSX recover a huge chunk of the losses sustained during the 2008-2009 downturn.

But the latest wave of pessimism means the Toronto market is down almost 6% from its highs of late April. Even worse, commodity sectors have taken a beating with the base metals sector down 27% from highs of almost two months ago as copper prices have tumbled 30% from highs of about US$3.61 a pound.

“The European, Greek, Portugese, Spanish news is indicating slower demand out of that area,” said Bob Tebbutt, vice-president risk management at Peregrine Financial Group Canada.

“Certainly in those countries the demand will be slower for goods because there won’t be as much money around to do it.”

And the energy sector has fallen about 8% with oil down sharply from its high of about US$87 a barrel from early May to US$71.51 on Friday.

A slowing Chinese economy has also left investors wondering how the resource sectors can rebound and take the TSX higher during 2010.

“And the story now is that they have been working down their inventories, that’s why they haven’t imported as much,” said Tebbutt.

Worries about Chinese growth stepping back increased last week after the government’s purchasing managers index fell from 55.7 to 53.9, which Tebbutt said “clearly shows that China’s efforts to slow down real estate speculation is affecting the whole economy.”

While it’s difficult to see how this lower demand can be reversed, Tebbutt said he is hopeful because “at some point they are going to juice the economy because they have slowed down the growth of investment properties. And number two, they have eaten into their heavy supplies of base metals.”

“And when they do turnaround, they could be very effective in raising prices.”