The Dow Jones industrial average closed down 733.08 points to 8577.91, the S&P 500 closed down 90.17 points to 907.84 and the NASDAQ closed down 150.68 points to 1628.33.

In Canada, the S&P TSX composite index closed down 631.83 points to 9323.83.

European stock markets closed in negative territory with the Eurostoxx down 159.24 points to 2249.51, the UK FTSE 100 down 314.62 points to 4079.59 and the German DAX down 337.56 points to 4861.63.

According to Colin Cieszynski, market analyst from CMC Markets Canada, the late-day decline was led by a further unwind as investors are forced to liquidate their positions.

"I think we are still seeing forced selling but it is hard to imagine there are any retail investors left," he said. "I think right now you are seeing institutions are being forced to sell."

Cieszynski added markets are now looking oversold following today's collapse in equities.

It was a bad start for equity markets, and it became increasing worse as the day progressed. Equities were first hit with weaker-than-expected U.S. retail sales, a dismal Empire state manufacturing survey and rising producer price inflation.

U.S. September retail sales excluding autos were down 0.6%, much lower than the expected 0.2% drop. Headline retail sales fell 1.2%, more than the forecasted 0.7%.

Meanwhile, PPI for September pointed to rising inflation with the core annualized rate up 4.0%, the highest level since 1991. Economists were forecasting a 3.8% rise.

"The details of the (Retail sales) report were simply disturbing," said strategists at TD securities. "On the whole, the strains on U.S. consumers are beginning to show, and this report is yet another indication that consumers are beginning to retrench their spending as they navigate against the headwinds coming from a weak domestic economy, tight credit conditions (despite the dramatic easing in monetary policy) and a deteriorating job market."

With equities breaking through key support levels - 8,500 in the Dow and 950 in the S&P 500 - traders are now focusing on Friday's lows of 7882 and 839 in the Dow and the S&P, respectively. John Glassman, head trader and managing director of Pacific American Securities, said he is expecting markets to hold those levels.

"I think that is defiantly going to be the line in the sand," he said. "I think last Friday is a tradable bottom. If you look at very rudimentary historical numbers¥ it shows that we are stretch to the end of the bear market and I can only hope we are," he said.

As equities melted, U.S. fixed income markets held a late-day rally with a sharp drop in the short end of the curve. Tony Crescenzi, chief bond market strategist from Miller Tabak, said the move into bonds show that the flight-to-quality sentiment remains strong.

"Equity markets have given up all of their earlier gains and I think that is a little unnerving," he said. "Today's economic news was very disappointing which will support bonds."

He said there is still fear that the recent global bailouts won't work and banks will continue to horde cash.

"There is fear that libor could open higher tomorrow and that credit markets will continue to be locked up," he said.

U.S. two-year yields were down 23.6 bps to 1.58%, five-year yields were down 16.3 bps to 2.85%, ten-year yields were down 10.9 bps to 3.97% and 30-year yields were down 5.6 bps to 4.22%.

Yields on two-year Canadian government bonds were down 5.9 bps to 2.27%, five-year yields were down 6.1 bps to 2.96%, 10-year were yields down 6.9 bps to 3.75% and 30-year yields were down 8.9 bps to 4.19%.

The Eurodollar June 08 contract was up 23.0 ticks to 94.08. The 10/2 year spread widened 13.07 bps to 238.85.

The spread between the U.S. 10-year note and the Canadian 10-year CGB widened 21.33 bps to 21.55 bps.

In Germany, returns on two-year German Bunds were down 6.8 bps to 3.13%, five-year yields were down 3.4 bps to 3.71%, 10-year yields were up 0.7 bps to 4.12% and 30-year yields were up 6.3 bps to 4.63%.

Yields on UK two-year bonds were down 4.3 bps to 3.84%, five-year yields were down 4.0 bps to 4.47%, 10-year yields were down 3.5 bps to 4.71% and 30-year yields were down 6.2 bps to 4.66%.

U.S. dollar continues to hold gains against most currencies as investors view the greenback as a safe haven.

Steve Butler, director of FX trading at the Bank of Nova Scotia, said the strong U.S. dollar shows that people are still being forced to liquidate their position and are afraid to put their money in any investments. He said a lot of investors are getting out of foreign investments and bringing their money home.

"The market has zero confidence right now," he said. "The worst part is that we don't have anything else to look forward in government announcements."

The Canadian dollar was down 1.90 cents to 0.8416 against the USD (1.18825 USD/CAD). Against the euro, the loonie was down 0.90 cents to 1.6048 (0.6228 CAD/EUR).

The U.S. Dollar Index was up 0.657 points to 82.02. Against the yen, the U.S. dollar was down 1.96 to 100.11.

The euro was down 1.20 cents to 1.35038, the pound sterling was down 1.20 cents to 1.7277 and the Australian dollar was down 3.50 cents to 0.6618, all against the USD.

All data taken at 4:40 p.m. EDT.

By Neils Christensen, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Nancy Girgis, This email address is being protected from spam bots, you need Javascript enabled to view it

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