Canada's TSX hits a 2-month low as financials slide

By Fergal Smith

(Reuters) - Canada's main stock index fell on Tuesday to its lowest level in nearly two months as the recent move higher in long-term borrowing costs weakened the outlook for corporate earnings.

The Toronto Stock Exchange's S&P/TSX composite index ended down 93.66 points, or 0.5%, at 19,691.21, its lowest closing level since June 26.

U.S. benchmark the S&P 500 also fell as worries lingered that the Federal Reserve will need to keep interest rates higher for longer and as banks shares eased.

"These (higher) yields are really hitting hard, especially for the banks," said Allan Small, senior investment advisor of the Allan Small Financial Group with iA Private Wealth.

"Their liquidity is drying up; credit is drying up; they're not lending as much; they're having to pay out more of the money to keep the money, otherwise money is going out the door, going into government bonds."

Canada's 5-year yield climbed 3.6 basis points to about 4.19%, its highest level since November 2007.

The TSX is expected to rise less than previously expected over coming months and could see a correction as investors grapple with a slowdown in China and higher borrowing costs, a Reuters poll found.

Financials, which account for 29% of the Toronto market's weighting, fell 1.2% ahead of the release this week of quarterly results from Canada's big banks.

The results are expected to bring forth challenges lenders face in setting aside more funds for bad loans in a tough economy, leading to a slowdown in deal-making and forcing borrowers to rethink fresh mortgages.

The consumer staples sector was down 0.6%, while energy lost 0.3% as the price of oil, one of Canada's major exports, settled 0.5% lower at $80.35 a barrel.

Helping to limit the TSX's losses, both technology and materials, which includes precious and base metals miners and fertilizer companies, added 0.3%.

(Reporting by Fergal Smith in Toronto and Shubham Batra and Shristi Achar A in Bengaluru, Editing by Marguerita Choy)