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Stocks, commodities, bond yields and the Canadian dollar fell sharply in one of the most severe setbacks for financial markets since the rollout of COVID-19 vaccines earlier this year, raising questions about whether the global economic recovery is stumbling.

The turbulence follows strong gains over the past year that lifted a number of equity benchmarks to record highs as recently as last week.

But the rallies stretched stock valuations to their highest levels since the technology bubble of the 1990s, even as central banks considered withdrawing extraordinary stimulus and some observers warned that economic growth may have already peaked – making stocks sensitive to a downturn.

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“The market has been marching up non-stop,” Stephen Takacsy, chief executive officer of Montreal-based Lester Asset Management, said in an interview.

“It’s one thing to go up on the rebound after such a sharp collapse last year. But it’s another thing to keep marching forward on an overly optimistic scenario of recovery,” Mr. Takacsy added.

The S&P 500 tumbled 68.67 points or 1.59 per cent, and the Dow Jones Industrial Average shed 725.81 points.

Canada’s S&P/TSX Composite Index fell 1.30 per cent and stocks sank in Europe as well.

Within the broad selloff, economically sensitive sectors – such as airlines and energy producers – were hit particularly hard, suggesting investors may be growing alarmed that the spread of the Delta coronavirus variant in many parts of the world could thwart hopes for a return to normalcy.

Air Canada shares fell 3.34 per cent and Suncor Energy Inc. fell 4.12 per cent.

Among commodities, copper fell 3.3 per cent and crude oil fell 7.5 per cent, after the Organization of the Petroleum Exporting Countries and Russia agreed to raise oil production quotas.

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The Canadian dollar, which has retreated against the U.S. dollar over the past month as markets began to anticipate that the Federal Reserve could raise interest rates sooner than expected, sank to its lowest level since early February.

The loonie – which can be sensitive to commodity prices – fell below 78.4 cents U.S. on Monday, down 1.1 per cent, after trading at a six-year high above US83 cents last month.

“The Canadian dollar’s highs are likely in the rearview mirror,” Josh Nye, senior economist at Royal Bank of Canada, said in a note.

In a sign that investors are embracing safer assets, government bond prices jumped higher, pushing down bond yields (which move in the opposite direction to prices).

The yield on the 10-year U.S. Treasury bond fell to a five-month low below 1.2 per cent. That’s down from a high above 1.7 per cent in March, when hopes for a sustained economic rebound underpinned the so-called reflation trade in financial markets.

“Overall, [falling bond yields] suggest a wider reassessment of the ‘reflation trade’ is now well underway, driven by growing concerns about the strength of the economic recovery amid the renewed spread of COVID-19,” Jonas Goltermann, senior markets economist at Capital Economics said in a note.

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Monday’s remarkable volatility comes as COVID-19 cases in the U.K. surge to their highest levels since January. Hundreds of thousands of Britons are self-isolating, including the country’s prime minister, suggesting widespread vaccinations may not be a sure road to recovery.

But Ian de Verteuil, head of portfolio strategy at CIBC World Markets, pointed out that financial markets are being weighed down by more than rising COVID-19 cases.

“When you think about today, is there anything that new on the virus? Not really,” he said in an interview.

Instead, he noted that markets are facing a number of inflection points that could pose additional challenges to stocks (which he highlighted in a note released last week).

Slowing growth in corporate profits is one such inflection. Profits have been rising at a blistering pace: Analysts expect earnings for companies in the S&P 500 will rise 63 per cent, year-over-year, in the second quarter.

But this growth may be as good as it gets. Analysts expect year-over-year earnings growth of 23 per cent in the third quarter and then 18 per cent growth in the fourth quarter.

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“After that, it goes into single digits. We go back to more normal situations, assuming the COVID situation doesn’t get meaningfully worse,” Mr. de Verteuil said.

What’s more, there may be fewer earnings surprises ahead. Analysts have been underestimating corporate profits by a wide margin over the past several quarters, leaving investors pleasantly surprised by financial results and confident in bidding up share prices.

There will likely be fewer pleasant surprises ahead, though, as analysts get better at estimating profits as lockdowns end – leaving steep stock valuations as a potential hurdle to the stock market.

“I don’t believe this is a major issue because there is still lots of fiscal and monetary stimulus. But after the run we’ve had, equities certainly looked like they were up on a stick,” Mr. de Verteuil said.

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