Rising fears around future economic growth weighed heavily on markets Friday, pushing Canada's main stock index sharply down along with the commodities that underpin so much of it, while U.S. markets also dropped.

The S&P/TSX composite index ended down 521.70 points, or 2.75 per cent, at 18,480.98 in broad-based declines led by the energy sector, while U.S. markets were down about 1.7 per cent, as investor worries about rising rates reached new heights.

"The Fed and other central banks have made no bones about it, they want to tighten policy and put it to a restrictive condition," said Steve Locke, chief investment officer of fixed income and multi-asset strategies at Mackenzie Investments.

Friday's drop comes after the U.S. Federal Reserve raised its key interest rate by three-quarters of a percentage point Wednesday and warned of more to come, a move which, combined with rising interest rates in other countries, is heightening concerns about how the rapid increases will affect the economy.

“It's really an accumulation of monetary policy effects as central banks around the world are tightening their policies in the face of the inflation wave," said Locke.

Markets have been feeling the pressure since August when Fed chair Jerome Powell indicated his resolve at tackling inflation after the Jackson Hole summit. 

The S&P/TSX composite index has fallen almost 1,800 points since mid-August and is now approaching the closing low reached this year on July 14 of 18,329.10.

In New York, the Dow Jones industrial average closed down 486.27 points, or 1.6 per cent, at 29,590.41 to reach a new low for the year. The S&P 500 index was down 64.76 points, or 1.7 per cent, at 3,693.23, while the Nasdaq composite was down 198.88 points, or 1.8 per cent, at 10,867.93, with both nearing their 2022 lows reached in the summer.

The economic growth concerns pushed into commodities as well Friday on the potential for less demand, said Locke.

"There's a greater likelihood of a more rapid slowdown and possibly a recession ahead. And when that happens, usually we see commodity prices generally trend a little bit lower because of the effects that slowing aggregate demand have on the demand for those base raw inputs."

The November crude contract down US$4.75 to US$78.74 per barrel and the November natural gas contract down 20 cents to US$6.99 per mmBTU.

The December gold contract was down US$25.50 at US$1,655.60 an ounce and the December copper contract was down 13 cents at US$3.34 a pound.

Falling energy and metal prices pushed the S&P/TSX energy index down 7.8 per cent, as big names like Suncor Energy Inc was down 9.26 per cent and Cenovus Energy Inc. was down 8.93 per cent.

The base metal index fell by 5.3 per cent, while financials was down 1.9 per cent and industrials down 1.4 per cent.

Rising interest rates in the U.S., and economic fears elsewhere, have also given a big boost to the U.S. dollar. 

It saw big gains against the U.K. pound after the government proposed a hugely expensive tax cut package, while it also continues to gain against the Canadian dollar as investors worry over how much rising rates will hit the Canadian economy. 

“Markets have begun to anticipate that the very interest rate sensitive Canadian economy could slow a little bit more quickly under the pressure of those higher yields," said Locke.

On Friday the Canadian dollar traded for 73.69 cents US compared with 74.18 cents US on Thursday.

And while rising rates are creating havoc in many markets, they are providing options for savers as a fair bit of future rate hikes have been priced into fixed income rates, said Locke. 

"That's probably providing investors who are looking for a safe alternative to add to their portfolio, some potential to add higher-quality fixed income into their portfolios, with yields that they haven't seen in over a decade.”

This report by The Canadian Press was first published Sept. 23, 2022.