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Wall Street’s three major indexes suffered their biggest daily percentage drop in almost two weeks on Wednesday as a surge in U.S. coronavirus cases intensified fears of another round of government lockdowns and worsening economic damage.

The TSX also closed lower, led by a 3.84% decline in the energy sector, with investors largely shrugging off a downgrade of Canada’s debt rating by Fitch Ratings.

Nasdaq, which had registered its fifth record closing high on Tuesday, snapped an eight-day wining streak, which was its longest since December 2019.

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The United States has recorded the second-largest rise in infections since the health crisis began, with a flare-up of cases in states where restrictions meant to contain the disease were lifted early.

Highlighting the seriousness of the resurgence in cases for many investors, the governors of New York, New Jersey and Connecticut announced that visitors from states with high coronavirus infection rates must self-quarantine for 14 days on arrival.

“Today was finally the day markets came to terms with the fact that increasing COVID-19 cases could mean a slower recovery in the economy,” said Art Hogan, chief market strategist at National Securities in New York.

Shares of U.S. airlines, resorts and cruise operators slumped as these sectors have been hardest hit by lockdowns. Royal Caribbean Cruises Ltd, Norwegian Cruise Line Holdings Ltd and Wynn Resorts all tumbled along with the NYSE Arca Airline index plunged.

The pandemic also appeared to be causing wider and deeper damage to economic activity than first thought. The IMF said it now expects global output to shrink by 4.9%, compared with a 3.0% contraction predicted in April.

Advanced economies have been particularly hard hit, with U.S. output now expected to shrink 8.0%, more than 2 percentage points worse than the April forecast.

Wall Street’s fear gauge, the CBOE volatility index, rose to a one-week high of 37.12 during the session.

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Cruise operator Carnival Corp fell 11% as it also faced a Standard & Poor’s credit rating downgrade for its bonds to junk status.

The Dow Jones Industrial Average fell 710.16 points, or 2.72%, to 25,445.94, the S&P 500 lost 80.96 points, or 2.59%, to 3,050.33 and the Nasdaq Composite dropped 222.20 points, or 2.19%, to 9,909.17.

Before Wednesday’s sell off, a slate of better-than-feared economic reports, easing lockdowns and massive stimulus measures had powered the Nasdaq to an all-time high and put the benchmark S&P 500 on track for its best quarterly performance since 1998.

“The market seemed pretty confident we were going to be in much better shape in 4-6 months from now. With the resurgence of cases they’re starting to discount that,” said Shawn Cruz, senior manager for trader strategy at TD Ameritrade in Jersey City, New Jersey.

Cruz also cited increasing tensions between the United States and Europe. On Tuesday the New York Times reported that Europe might not allow visitors from the United States when it reopens.

Then the United States moved to maintain pressure on the European Union in a 16-year dispute over aircraft subsidies by flagging possible changes in tariffs on EU goods, as the date for a decision on reciprocal EU duties slipped to the autumn.

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In Toronto, energy stocks were a particular sore point, as oil prices tumbled over 5%, or more than $2 a barrel, after U.S. crude storage hit another record. The S&P/TSX Composite Index closed down 270.37 points, or 1.74%, at 15,294.38. Smaller and less stable energy stocks led the decline, with Secure Energy Services, Torc Oil & Gas, and Vermilion Energy all down by more than 8%.

“The market is signaling that if it doesn’t get constant reassurance that we are emerging from the breakdown in demand that happened because of the pandemic, then higher oil prices really don’t make sense,” said Gene McGillian, vice president of market research at Tradition Energy in Stamford, Connecticut.

Brent crude settled at $40.31 a barrel, down $2.32, or 5.4%. On Tuesday, Brent hit its highest price since early March, just before the pandemic and Saudi-Russia price war roiled markets.

U.S. West Texas Intermediate (WTI) crude settled at $38.01 a barrel, losing $2.36, or 5.8%.

A stronger U.S. dollar, which moves inversely with oil, and a slump in equities also weighed on prices.

U.S. crude oil inventories swelled last week by 1.4 million barrels, exceeding expectations for a 299,000-barrel rise, the Energy Information Administration said.

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That marked the third straight record for crude in U.S. storage.

India’s oil imports in May hit the lowest since October 2011 as refiners with brimming crude inventories cut purchases.

China, the world’s top crude importer, is also expected to slow imports in the third quarter, after record purchases in recent months.

Read more: Stocks that saw action Wednesday - and why

Read more: What the Street said Wednesday as stocks backpedaled

Reuters, Globe staff

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