TSX and Dow sell off sharply as global recession fears bubble up again

Stock markets just about everywhere sold off on Wednesday amid more signs that the global economy is getting worse and the U.S. government's response will do little to help things.

The Dow Jones Industrial Average closed down at 494.42 points to 26,078 after losing more than 500 points throughout the day, while in Toronto the S&P/TSX Composite Index closed down at 136.69 to 16,310 after being down by 194 points throughout the day.

European shares fared even worse, with benchmark stock indices in France, Germany and Britain all down by at least two per cent. Wednesday's sell-off comes on the heels of a smaller one on Tuesday, the first day of October, which is traditionally a bumpy one for stock markets.

The catalyst for the sell-off seems to be growing signs that the global economy is slowing down and could even soon contract. A closely watched index of U.S. manufacturing on Tuesday showed that the sector has now shrunk for two months in a row. Worse, the Institute for Supply Management index actually fell to its lowest level in more than a decade. 

Indicators in Europe and Asia are showing similar signs, which are stoking fears that the world economy could be about to tip into recession.

"The global manufacturing recession is global," Kit Juckes with French investment bank Societé Generale said. "Some of it comes from China, and some of it comes from the White House but it's pretty global, and while Germany is suffering worse than anyone else, even the U.S. is feeling it."

Bond yields fell around the world. That's a sign that investors are shifting money into less-risky holdings because economic growth is in doubt.

Shares in financial companies like banks — which make up a large part of the TSX — sold off because lower interest rates are bad for their profit margins.

The World Trade Organization added to the concerns in a trade ruling that opens the door to even more tariffs on trade between Europe and the United States as part of a long-standing dispute over aerospace subsidies.

The deadline for Britain to exit the European Union is also rapidly approaching, with a hard deadline set for Oct. 31. That uncertainty could throw another roadblock in the way of the steady flow of goods and services around the world. Couple that with the ongoing trade war between the U.S. and China showing no signs of waning, and you have a recipe for negativity.

"The stage is being set for major trade showdowns this month," said Colin Cieszynski, market strategist at SIA Wealth Management in Toronto.

Neil Campling, analyst at Mirabaud Securities, says investors are keeping a close eye on the numbers, and they're not liking what they see.

"It's going to be a tough season, and the most important thing will be how the companies view … the early outlook for 2020, which is shaping up to be a tough year for markets."