The nerves of investors appear to have finally snapped amid mounting fears that the global recovery is stalling and that governments and central bankers are fast running out of ways to fix it.
Oppressive worries of a return to recession plunged stocks into freefall Thursday, sent many currencies tumbling and left most commodities bloodied.
The Dow Jones average fell 4.3 per cent, its biggest one-day drop since the darkest days of the global financial crisis in December, 2008. The Toronto stock index plunged 3.4 per cent, the worst since June, 2009. And when markets opened in Japan, the benchmark Nikkei index immediately plummeted 2 per cent.
There was no specific economic event on Thursday behind the selloff, instead a multitude of factors seemed to propel the downward action, ironically on the very week that Washington finally raised its debt ceiling and after the Europeans appeared to be getting a handle on their debt crisis.
As if to underscore the market fears, José Manuel Barroso, the European Commission president, said the euro zone has neither an adequate rescue fund nor the powers needed to get the current debt crisis under control, especially if Italy and Spain require help. His warning came just two weeks after European leaders approved funding and wider powers for a €440-billion fund designed to bail out insolvent countries.
Months of turmoil have driven investors to the safe havens of Treasury bonds, gold and traditionally strong currencies such as the Swiss franc, the Japanese yen – and more recently the Canadian dollar and Brazilian real.
But when the smoke cleared Thursday, only Treasury bonds were still attracting vast amounts of capital as the last tame harbour in a sea of trouble.
With simmering fears of renewed recession now at a boiling point, markets are in desperate need of a jolt of good economic news. If job numbers coming out Friday in the United States and Canada turn out to be worse than expected, it could turn out to be an even blacker day.
Unless confidence is restored quickly, there is a danger the market pain will spread throughout the struggling global economy – hitting the still recovering financial sector, further squeezing hard-pressed consumers, and choking off production.
"It's ugly out there," said David Bouckhout, senior commodity strategist at TD Securities. "I think there's more to it than just the doldrums of summer. This is much more of a move that the market is signalling that there are some real concerns out there."
The European and U.S. economies are not where investors had hoped they would be at this point since the last recession. While China's growth remains strong, it too is showing signs of slowing.
Many of the problems roiling the markets – debt woes compounded by political instability in Europe and the United States, inflationary pressures in China and other emerging markets, chronically weak spending by heavily indebted American consumers and persistently high unemployment in the United States and other industrial countries – have been plain for all to see for months. To make matters worse, stimulus spending by various governments is all but over.
Even in the absence of job growth, optimists have pointed to remarkably strong corporate profits, the improved financial health of banks and continued buoyant demand from fast-growing China for resources of every type as evidence that the current trouble in the global economy is no more than a temporary soft patch.
In an increasingly polarized market, the doomsters have been countered by bullish investors seeking higher returns than they can obtain from government bonds or cash. Now, though, the gloom appears to have caught up to them after disheartening political and economic developments on several fronts.
"It's a bipolar market. What's surprising about it is the extremes of the polarities. There are some people who think doom is around the corner and others who think that we're through and we'll be fine," said Roger Beauchemin, president of investment manager McLean Budden.
Despite the market selloff, many Canadian corporate executives remain upbeat, citing strong sales across retail, resource, technology and manufacturing sectors. But they are bracing themselves in case the economy and the markets weaken further.
"We haven't seen any reflection of this in our business at this stage of the game, but that's not to say that we're not concerned about what could happen as a result of it," said Fraser Edison, chief executive officer of Rutter Inc., a Newfoundland-based manufacturer of electronic equipment.
Jim Evaskevich, president and chief executive officer of Calgary-based junior oil and gas exploration company Yangarra Resources Ltd., is currently sloughing off the situation as "just a wonderful buying opportunity that we see periodically."
Yet investor fears overshadowed more good profit reports from corporate heavyweights such as General Motors, whose second-quarter earnings nearly doubled, and mining giant Rio Tinto, which had a record gain in the first half.
The feeling of doom in the markets is palpable.
The risk "to this upbeat phase of the profits cycle is that our corporate leaders are also starting to lose their confidence in the ability of our political leaders to solve our problems," veteran Wall Street economist Ed Yardeni said in a downbeat note to clients. "The policy responses seem to be too little, too late. They seem to be making the problems worse."
The market rout is based on signs that already poor conditions are getting worse. In Europe, the vital interbank loan market, through which banks obtain funds from each other, froze up on Thursday, financial sources say. As a result, the European Central Bank reopened an unlimited funding facility for euro-zone banks. Similar credit freezes in 2007 and 2008 helped trigger a global banking crisis.
Some analysts remain more bullish even in the face of weakening economic growth.
Kate Warne, an investment strategist with Edward Jones, argued that the market activity is more about fear than fundamentals.
"Typically, economies don't just sort of slide into recession. They are shocked," Ms. Warne said. "In other words, there is something that happens that pushes the economy over the edge. And nothing that we've seen so far is something that would typically push an economy from expansion, which is its natural state, into recession. And that is true, even though the expansion on both sides of the border is a lot weaker than what we would typically see."