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Already unnerved by the newest COVID-19 variant, U.S. and Canadian markets suffered deepened losses on Tuesday after the head of the Federal Reserve said it will consider shutting off its support for financial markets sooner than expected.

The S&P/TSX Composite Index tumbled 2.31 per cent, its biggest daily percentage decline of 2021 and surpassing Friday’s pullback after news first emerged of the Omicron variant. The S&P 500 fell 1.9 per cent, erasing its gains from a day earlier.

Fed chair Jerome Powell told Congress the central bank may halt the billions of dollars of bond purchases it’s making every month “perhaps a few months sooner.” It had been on pace to wrap up the purchases, meant to goose the economy by lowering rates for mortgages and other long-term loans, next June.

An end to the purchases would open the door for the Fed to raise short-term interest rates from their record low of nearly zero. That, in turn, would dilute a major propellant that’s sent stocks to record heights and swatted away concerns about an overly pricey market. As investors moved up their expectations for the Fed’s first rate hike following Mr. Powell’s remarks, yields on short-term U.S. Treasuries rose.

“We’ve long maintained that the Fed is the ultimate owner of the ‘transitory’ characterization and the chair’s decision to move beyond that is a decidedly hawkish step,” commented Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.

What really caught the market off guard, said Douglas Porter, chief economist at BMO Capital Markets, “was the change in tone given the emergence of concern over the economic outlook amid the newest variant.”

Stocks were already weak Tuesday morning prior to Mr. Powell’s comments, due to concerns about how badly the fast-spreading Omicron variant may hit the global economy.

The chief executive officer of Moderna Inc. predicted in an interview with the Financial Times that existing COVID-19 vaccines may be less effective at combatting Omicron than they were with earlier variants. Regeneron Pharmaceuticals Inc. also said Tuesday that its monoclonal antibody treatment may have reduced effectiveness on Omicron. Shares in Moderna fell 4.4 per cent, while Regeneron dropped 2.7 per cent.

Much is left to be determined about the variant, including how much it may slow already gummed-up supply chains or scare people away from stores. That uncertainty has sent Wall Street through jagged up-and-down jolts as investors struggle to handicap how much economic damage Omicron will ultimately do.

“There will be heightened volatility around any piece of information,” said Kristina Hooper, chief global market strategist at Invesco. She said markets will likely remain cautious “before we know more.”

The S&P/TSX Composite Index closed down 489.01 points, at 20,659.99, its biggest decline since October, 2020. For November, it lost 1.8 per cent.

The heavily weighted financials group ended 2.8 per cent lower even as Bank of Nova Scotia kicked off Canadian banks’ fourth-quarter results reporting with better-than-expected profits driven by lower loan loss provisions.

Technology stocks declined 2.1 per cent in Toronto and industrials were down 2.2 per cent.

“Canada is basically getting caught up in a general pullback in equity markets around the world,” said Colin Cieszynski, chief market strategist at SIA Wealth Management.

Domestic economic data released Tuesday was encouraging, showing Canada’s economy growing an annualized rate of 5.4 per cent in the third quarter, but the news gained little traction with stock market investors.

“Q3 is quite a ways back in the rear-view mirror ... the market is focusing on other things now,” Mr. Cieszynski said.

The S&P 500 dropped 88.27 points to 4,567. The benchmark index sank 2.3 per cent Friday for its worst loss since February, only to rise 1.3 per cent Monday as investors reconsidered whether the reaction was overdone, before giving way to Tuesday’s loss. The index closed out November with a 0.8-per-cent loss.

Even with the recent losses, the S&P 500 index is up 21.6 per cent for the year and the TSX has gained 18.5 per cent.

Gold usually does well when fear among investors is rising, but its price slipped 0.5 per cent on Tuesday. Higher interest rates could reduce the appeal of gold, which doesn’t pay its holders any interest.

Crude oil prices slid with concerns that a global economy weakened by Omicron would burn less fuel. West Texas Intermediate crude, the U.S. benchmark, dropped 5.4 per cent and touched its lowest level in three months. Brent crude, the international standard, fell 3.9 per cent.

In November, oil prices dropped by the most since March, 2020, the start of widespread lockdowns because of the pandemic. Brent fell by 16.4 per cent for the month, while WTI declined 20.8 per cent.

“The threat to oil demand is genuine,” said Louise Dickson, senior oil markets analyst at Rystad Energy. “Another wave of lockdowns could result in up to three million [barrels per day] of oil demand lost in the first quarter of 2022 as governments prioritize health safety over reopening plans, of which there is already telltale evidence, from Australia delaying its reopening to Japan banning foreign visitors.”

If Omicron does ultimately do heavy damage to the global economy, it could put the Federal Reserve in a difficult spot. Usually, the central bank will lower interest rates in a crisis, which encourages borrowers to spend more and investors to pay higher prices for stocks.

But low rates can also encourage inflation, which is already high across the global economy. Mr. Powell acknowledged in his testimony before Congress that inflation has been worse and lasted longer than the Fed expected. For months, officials described inflation as only “transitory,” but Mr. Powell said that word no longer works.

One signal in the bond market was also flashing some concern about the economy’s prospects. Long-term Treasuries usually offer higher yields than short-term ones, in part to make up for the increased risk that future inflation may eat into their returns.

A 10-year Treasury is still offering more in yield than a two-year Treasury, but the gap narrowed sharply on Tuesday. The two-year yield rose to 0.54 per cent from 0.51 per cent late Monday. The 10-year yield, meanwhile, fell to 1.45 per cent from 1.52 per cent.

Many investors see that narrowed gap as meaning the bond market has less confidence in the economy’s long-term strength. If the gap were to flip, with short-term yields rising above long-term ones, many investors see that as a semi-reliable predictor of a recession.

Read more: Stocks seeing action on Tuesday - and why

With reports from Associated Press and Reuters

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