TORONTO (Reuters) - Trip-wire volatility has marked the Toronto Stock Exchange's first full trading week of the year and observers predict the bouncy, roller-coaster ride is far from over.

The Toronto Stock Exchange's main index faces a number of headwinds left over from last year, including fears of a full-blown recession south of the border, or at least a major slowdown for Canada's main trading partner.

And then there's the continuing fallout and credit squeeze from the struggling US sub-prime mortgage market.

Canadian financials have been pressured by the bad news spilling over from the United States — in particular Canadian Imperial Bank of Commerce, which has the biggest exposure to the subprime market. Even Toronto-Dominion Bank , which has repeatedly stressed it has no sub-prime exposure, has felt the squeeze.

"I think right now with the US economy slowing and the Canadian economy potentially slowing, that what you've got is the market trying to reassess how bad will this be and how long will it take," said Kate Warne, Canadian market strategist at Edward Jones in St. Louis, Missouri.

"So, we're likely to see big moves both down and up because I think expectations are changing and they're swinging — they're not just changing in a negative direction," Warne said.

The uncertainty surrounding the economic problems and how deep the fallout could be has led to knee-jerk reactions in the market, as it bounces up and down — often in the same session — twitching to the latest developments and swings in sentiment.

Along with financials, movements in the heavyweight energy sector have been a major factor behind market volatility as crude topped the much-anticipated $100-a-barrel mark at the start of the year.

But the sector has also been hurt by worries of a slowdown in global growth, which would blunt demand for resources, including energy.

Even with the swings, the Toronto market's overall direction has been down, as the index has trimmed 1.5 percent so far in 2008.