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U.S. and Canadian stocks fell sharply Wednesday after Federal Reserve Chairman Jerome Powell warned of extended economic weakness due to the coronavirus pandemic and called for Congress to agree on additional fiscal support.

Investors appeared to price in a deeper economic downturn than they had previously expected as they worried that Powell’s call for additional stimulus would go unanswered.

Sentiment for Toronto Stock Exchange stocks was further undermined by news that Norway’s US$1-trillion wealth fund blacklisted some Canadian oil companies such as Canadian Natural Resources Ltd and Suncor Energy Inc. The fund operates under ethical guidelines set by that country’s parliament and said it was excluding the companies for producing excessive greenhouse gas emissions.

The benchmark U.S. S&P 500 index fell 1.75 per cent and Canada’s S&P/TSX Composite Index lost 2.54 per cent to a two-week low as the energy sector tumbled 5.75 per cent.

While Powell pledged in a webcast to use the U.S. central bank’s power as needed, he suggested that it might not be enough to avoid deep economic damage without more fiscal support.

Powell pointed to uncertainty over how well future outbreaks of the virus can be controlled and how quickly a vaccine or therapy can be developed, and said policymakers needed to be ready to address “a range” of possible outcomes.

“It will take some time to get back to where we were,” Powell said in a webcast interview with Adam Posen, the director of the Peterson Institute for International Economics. “There is a sense, growing sense I think, that the recovery may come more slowly than we would like. But it will come, and that may mean that it’s necessary for us to do more.”

Mr. Powell described the outlook as “highly uncertain and subject to significant downside risks.”

For a central banker who spent part of his career as a deficit hawk and has tried to avoid giving advice to elected officials, the remarks marked an extraordinary nod to the risks the U.S. economy is facing from the combined health and economic crisis brought on by the pandemic.

The U.S. central bank has slashed interest rates to near zero and set up a broad network of programs to ensure financial markets continue to function during the pandemic. It has also established precedent-setting lending facilities for companies and the first-ever corporate bond purchases.

Congress, for its part, has allocated nearly US$3 trillion for economic relief during the crisis.

“He’s saying if you want to avoid a slow recovery and long-term economic damage you need a strong fiscal response, effectively placing that responsibility back over to governments instead of central banks,” said Shawn Cruz, manager of trader strategy at TD Ameritrade in Jersey City, New Jersey.

And divisions among Republicans and Democrats appear to have dimmed the prospects for additional fiscal support from Congress, according to Jeff Kleintop, chief global investment strategist at Charles Schwab.

Market participants said they were relieved by an indication by Powell that the Fed would not push interest rates below zero, but some seemed taken aback by his downbeat view on the economy.

Schwab’s Kleintop said Powell’s tone was more pessimistic than in the recent past. “The market took away that maybe there’s more bad news out there than they’d been pricing in,” he said.

Powell’s comments followed a sharp selloff in equities on Tuesday after a warning from leading U.S. infectious disease expert Anthony Fauci that the virus was not yet under control. Fauci’s comments prompted concerns about how the economy would emerge from weeks of virus-related lockdowns.

The depth of Wednesday’s decline on Wall Street was due to the combination of Fauci’s comments and Powell’s warning, TD Ameritrade’s Cruz said: “The biggest implication is that some of the economic activity we’ve lost may never be recovered.”

Another negative factor was a decision by an independent board overseeing billions in federal U.S. retirement dollars that it would indefinitely delay plans to invest in some Chinese companies.

“It adds to the tension ahead of an announcement Trump said could come this week on the Phase One (U.S.-China) trade deal,” said Schwab’s Kleintop.

Investor bets on a swift recovery had helped the three main U.S. stock indexes and the TSX climb about 30 per cent from their March lows.

But as officials around the world and in parts of the United States began easing lockdown rules with a view to restarting local economies fears of a second wave of COVID-19 infections have diminished those hopes.

Losses on the TSX Wednesday were broad across sectors, with financials losing 3.86 per cent. Royal Bank of Canada lost 2.82 per cent, which easily gave Shopify back the crown as the most valued stock on the TSX, as it gained 1.53 per cent for the day. Shopify’s market cap is now C$127.7-billion vs. $117.3-billion for RBC, according to Globe and Mail calculations.

Reuters, with files from Globe staff

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