In a stunning turn of events that sparked a landslide sell-off in equity markets, the U.S. House of Representatives rejected the Emergency Economic Stabilization Act in a final vote of 228 to 205. The result triggered a historic sell-off in equity markets, with the Dow Jones falling more than 770 points, or 6.96%, the S&P 500 freefalling 106 points, or 6.74%, and the Nasdaq selling off nearly 200 points, or 9.14%. In Canada, the TSX fell more than 840 points, or 6.93%.

"If the legislation is indeed moribund - as it seemed to be on Monday afternoon -- then the baton will pass quickly to the Fed and other central banks to deal with the fallout - which would be further tightening of credit conditions and upward pressure on borrowing spreads," economists from Global Insight noted. "A coordinated central bank rate reduction of 50 basis points, or more - by the Fed, the Bank of England, the Bank of Canada and the Reserve Bank of Australia - is certainly not off the table given the scale of the crisis. At a minimum we would be looking for the Federal Reserve to cut interest rates sooner rather than later."

The financial troubles of the day began in Europe, with emergency action being taken on Belgium's Fortis Bank, Germany's Hypo Real Estate, the UK's Bradford & Bingley and Iceland's Glitnir Bank. Fortis Bank was partly nationalized by the Belgian, Dutch and Luxembourg governments after the company's stocks fell to 15-year lows on Friday.

In addition, German bank Hypo Real Estate received a €5-billion bailout from private German banks and the government while UK mortgage lender Bradford & Bingley was nationalized. Furthermore, the Icelandic Central Bank acquired a 75% stake in Glitnir Bank for €600 million. The central bank's governor, David Oddson, said that without intervention, the bank would have failed within weeks.

In yet another co-ordinated effort amongst world central banks to boost liquidity, the Federal Reserve, European Central Bank, Bank of Canada, Bank of England, Bank of Japan, Denmark's National Bank, Norges Bank, Reserve Bank of Australia, Riksbank and Swiss National Bank announced plans to increase funding operations worldwide.

In addition to the move, the Fed said it would increase the size of the 84-day TAF auction to $75 billion, and conduct two "forward TAF" auctions worth $150 billion each in November. The timing of the operation has yet to be determined.

The U.S. government also announced it facilitated a takeover of Wachovia by Citigroup. The agreement is a complex deal that shares liabilities between the Federal Deposit Insurance Corporation (FDIC) and Citigroup while leaving Wachovia holding some of its assets. Treasury Secretary Henry Paulson said if Wachovia was allowed to fail, it would pose a "systemic risk" and that he's "committed to taking all actions necessary."

The U.S. Department of Justice and the Securities and Exchange Commission announced that they have launched investigations into Fannie Mae and Freddie Mac over accounting and disclosure issues from Jan. 1, 2007 to the present.

Stock markets were down significantly, with Toronto's S&P/TSX composite index down 458 points to 11669, the Dow Jones industrial average down 278 points to 10865, the S&P 500 down 42 points to 1171 and the Nasdaq down 87 points to 2096.

In the only significant data of the morning, the Federal Reserve's preferred measure of inflation, the personal consumption expenditures (PCE) core deflator, advanced by 0.2% (0.244%) in August, in line with expectations and contributing to a year-over-year change of 2.6% (2.558%), according to a report released by the U.S. Department of Commerce. Markets had been expecting a 0.2% monthly gain in core PCE following the previous month's 0.3% rise. On a year-over-year basis, economists expected another 2.4% rate, matching July's level.

The report also showed a 0.5% month-over-month increase in personal income in August, following a 0.7% contraction in July and a 0.1% gain in June. Total personal spending, which comprises roughly 70% of U.S. gross domestic product, was flat on the month compared to previous month's 0.2% gain and below expectations for a 0.2% gain.

Meanwhile, Texas business activity plunged in September, according to the Dallas Fed's manufacturing report released Monday, falling to a reading of -23.3 from August's -14.6 level. "Most indicators of current production and general business conditions recorded their lowest readings since the survey's inception in 2004," the report said.

In Canada, the government announced it paid off $9.7 billion from its accumulated debt in the fiscal year that ended on March 31, 2008, according to a year-end financial report. The debt stood at $457.6 billion at the end of the 2007-08 fiscal year, down from $467.3 billion at the end of the previous year. The federal debt at the end of 2007-08 represented $13,774 for each Canadian, down from $14,215 a year earlier.

Spending on tourism in Canada rose 0.9% in the second quarter of 2008, even as expenditures by foreign visitors declined 0.1%, Statistics Canada reported. It was the second straight quarter to see a seasonally adjusted 0.9% increase. Tourism spending has increased in every quarter since the second quarter of 2003.

Overnight data releases included the euro zone business climate index, which worsened more than expected in September, falling to -0.79, the European Commission reported. September's decline was more than the -0.5 figure expected and follows August's decline to -0.28, which was revised up from an initial estimate of -0.33. Euro zone consumer sentiment, on the other hand, showed no movement and remained stable at -19 in September, in line with the consensus forecast.

The UK M4 money supply grew 11.5% in the 12 months to August, according to the Bank of England, in line with preliminary estimates and 0.3 percentage points up from July's yearly gain. Month-over-month, the money supply increased 1.4% in August, also in line with preliminary estimates, following July's 0.9% increase.

By Stephen Huebl, This email address is being protected from spam bots, you need Javascript enabled to view it , with contributions from Erik Kevin Franco, This email address is being protected from spam bots, you need Javascript enabled to view it , Adam Button, This email address is being protected from spam bots, you need Javascript enabled to view it , Todd Wailoo, This email address is being protected from spam bots, you need Javascript enabled to view it , Steve Stecyk, sstecyk@economicnews and Sean McKibbon, 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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