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A wild day of trading Tuesday exposed the market's drum-tight nerves.

After an early plunge on speculation Europe's financial crisis is worsening, stock markets in Canada and the U.S. stormed back to finish the day with only relatively small losses as investors pinned their hopes on a better-than-expected report on U.S. service-sector activity.

In early trading, yields on the benchmark 10-year U.S. Treasury bond hit their lowest level on record. They recovered to finish the day unchanged from where they began.

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While money managers agree that Europe's spreading debt problems and sluggish U.S. growth are casting a pall over expectations for corporate earnings, there is no consensus on how deep this downturn may be – or, in fact, whether there will be a downturn at all.

"There are two scenarios out there," said Eric Lascelles, chief economist at RBC Global Asset Management in Toronto. "One is recession … a relatively modest one. If you avoid a recession, it will probably be sluggish growth."

The S&P/TSX Composite Index lost 84 points, or 0.7 per cent, to 12,518.54, after slumping as low as 12,355.92. In New York, the S&P 500 slipped 0.7 per cent to 1,165.24, but was down as low as 1,140.13 in morning trading.

Tuesday marked the TSX's third consecutive decline following four straight gains. Money managers are wrestling with how to make sense of the discrepancy between strong corporate earnings and an increasingly dim economic outlook.

There are growing fears that Europe's financial crisis is going to turn worse. Markets began to sell off after the Swiss central bank announced that it was taking the extraordinary step of intervening in currency markets to put a cap on its soaring franc. Meanwhile, Italian labour unions went on strike to oppose cutbacks in government spending.

On this side of the Atlantic, record-low yields for U.S. bonds suggest that the world's largest economy is weakening. A report Friday indicated the United States had created zero jobs in August.

But the market picked up after the release Tuesday morning of an Institute for Supply Management survey that showed service-industries activity had unexpectedly expanded in August.

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Traders are waiting to hear a key address Thursday by President Barack Obama, who will unveil his job-creation plan to Congress. Ben Bernanke, chairman of the Federal Reserve, will speak the same day and may provide insight into plans for additional stimulus.

Yields on the benchmark 10-year U.S. Treasury fell as low as 1.9066 per cent in morning trading, a new low that reflects the dimming outlook for economic growth as well as a flight to safety by investors.

One factor driving down yields on long-dated Treasuries is speculation that Mr. Bernanke will announce measures to buy longer-term bonds and sell shorter-term debt to bring down long-term interest rates and goose economic expansion.

"We're headed toward weaker growth, possibly a recession, in both Europe and the U.S.," said Lacy Hunt, chief economist at Hoisington Investment Management in Austin, Texas. "That's the mentality that is gradually seeping into the markets. There's going to be a lot of volatility."

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