Stocks slump on economic gloom

World stock markets sold off Wednesday amid worries about the strength of the economic recovery.

Investors were spooked by widening trade deficits in both Canada and the U.S.,slowing Chinese growth, andthe U.S. Federal Reserve's admission a day earlier that the U.S. economy's rebound has been modest.

In Toronto, the S&P/TSX composite index closed down 256.08 points, or 2.16 per cent, at 11,582.21.

U.S. stocks erased the year's gains. The Dow Jones industrial average finished with a loss of 265.42 points, or 2.49 per cent, at 10,378.83.

The Nasdaq composite index was down 68.54 points, or three per cent, to 2,208.63 and the S&P 500 index fell below 1,100, losing 31.59 points, or 2.82 per cent, to 1,089.47.

Currency markets also saw their share of turmoil. The U.S. dollar made its biggest gain against the euro in three months.

But traders also moved out of the euro andinto the perceived relative safety of the yen, pushing theU.S. dollar to a 15-year low against the Japanese currency of one dollar to84.72 yen, after a report on slowing Chinese growth.

It had pared some of that loss, to 85.40 to the yen, late in the afternoon in North America.

The Canadian dollar ended down 1.20 cents to 95.67 cents US.

The September crude contract in New York closeddown $2.23 to $78.02 US a barrel. December gold gained$3.80 to $1,201.80 US an ounce.

On Tuesday, the Federal Reserve said at the end of its meeting on interest rates that "the pace of recovery in output and employment has slowed in recent months."

David Baskin, the president of Baskin Financial Services told CBC News the selloffcame down mostly to the Fed's statement,which "really wasn't a big surprise to anybody. I think everybody has acknowledged that the U.S. economy was growing slowly."

Markets looking for an excuse

Baskin said markets werelooking for an excuse to take back some of the gains made over the last five weeks.

"Stock prices are driven by corporate profits," he said, "in most cases [recent profits have] exceeded even the most optimistic forecasts and what that means to us is that stocks are not overvalued."

Traders also worried about a sharp jump in Canada's trade deficit with the rest of the world during June, to $1.1 billion from $695 million in May,as exports fell by 2.5 per cent.

The U.S. trade deficit also grew, surging in June to the highest level in 20 months as imports ofconsumer goods hit an all-time high and exports faltered. The Commerce Department said the deficit jumped 18.8 per cent in June fromMay, widening to $49.9 billion US.

As well, China's economic growth slowed from 11.9 per cent in the first three months of the year to 10.3 per cent in the second quarter as Beijing rolled back its stimulus after China rebounded quickly from the global slump. Strong Chinese demand has been seen as essential to the global recovery.

In Asia, Tokyo's Nikkei 225 stock average closed down 2.7 per cent, Hong Kong's Hang Seng shed 0.8 per cent however the Shanghai Composite Index gained 0.5 per cent.

London's FTSE 100 index closed down 2.4 per cent, Frankfurt's DAX lost 2.1 per cent and the Paris CAC 40 was down 2.7 per cent.