An onslaught of dismal economic news has sparked a severe case of the jitters among investors, with seemingly few places to hide.
The latest economic measures paint a picture of a global recovery that has slowed to an alarming degree, and raise fears that commodity prices have further to fall, setting the stage for more volatility ahead – particularly for Canada's commodity-sensitive benchmark index.
Investors fled from stocks and commodities Thursday amid disappointing reports from virtually every corner of the globe, testing the confidence of the markets at a time when the health of the world economy is already threatened.
Canada's benchmark index suffered its worst one-day decline since October in a global rout that hit everything from U.S. and European stocks to oil and copper. Even gold, seen by some investors as a haven in troubled times, took its biggest tumble in four months.
In the United States, weekly initial jobless claims edged higher. Home sales fell in May, marking a step back in a tentative housing recovery. And a regional survey of manufacturing activity contracted sharply, suggesting troubles ahead for the entire U.S. manufacturing sector.
"The U.S. is really supposed to be the last refuge, where we go to hide," said Frances Donald, financial economist at Brockhouse Cooper, pointing to the country's economic momentum. "So when you get hit with these bad numbers, it shocks the system. You wonder where else you're supposed to go."
The S&P 500 closed at 1,325.51, down 30.18 points or 2.2 per cent. Canada's S&P/TSX composite index ended at 11,408.32, off 351.02 points or 3 per cent.
It wasn't just the United States.
In China, an initial reading on manufacturing activity retreated deeper into contraction territory, renewing concerns that the economy is in a dangerous downturn.
In the troubled euro zone, a manufacturing report fell to its lowest level in three years and included a weak outlook for employment.
"With labour components continuing to deteriorate, it becomes even more painful for politicians to put in place these austerity measures," said Stéfane Marion, chief economist and strategist at National Bank Financial.
Along with the weak economic reports, two analysts from Goldman Sachs Group Inc. recommended that investors sell short the S&P 500 – or bet that the U.S. benchmark index will fall – adding one more reason to shy away from stocks.
The Federal Reserve had already dented the hopes of the markets with a bleaker view on the economy on Wednesday. And while the Fed sent a clear message that it would do its part to support the economic recovery should conditions deteriorate further, for now it offered just an extension of an earlier stimulus program, known as Operation Twist, disappointing some expectations.
Canada was not immune. A Statistics Canada report showed retail sales fell 0.5 per cent in April just as Ottawa was introducing bold new mortgage rules designed to take some of the heat out of the housing market.
Mark Carney, the Governor of the Bank of Canada, said he would likely lower his economic projections for Canada this year.
In his last projections, he had seen economic growth of 2.4 per cent in 2012, which now looks optimistic given that the economy grew at an annualized pace just 1.9 per cent in the first quarter.
"I'm not particularly surprised by the bank wanting to revise down their outlook, given the deterioration in the global outlook and the drop in commodity prices," said David Madani at Capital Economics.
Commodity producers were among the worst-hit stocks, following commodity prices.
Crude oil fell to $78.20 (U.S.) a barrel, marking its first foray below the $80-mark in eight months. Gold fell more than $50 an ounce to $1,565.50.
Commodities had been indicating a gloomy outlook for the global economy for more than a year, and the rest of the market now seems to be listening up.
The Reuters/Jefferies CRB index, a basket of 19 commodities, is well within bear market territory following a 14-month slide. It has fallen 28 per cent since April, 2011.
The action in the oil market has been shorter and sharper. In New York, crude has plunged 26 per cent over the past seven weeks alone.
The market dip follows what had been a good month for stocks so far, as investors anticipated that the Federal Reserve would meet deteriorating economic conditions with another round of stimulus.