The fragile markets were caught off-guard

Answer B is an attempt to end the sentence with an absolute phrase (see the Manhattan GMAT Sentence Correction book for more on absolute phrases). I believe the problem with answer B is the use of "an event" to modify the entire preceding clause. First, it seems a bit strange to call "an unexpected drop in retail sales" an "event." Also, if the absolute phrase is supposed to modify the entire preceding clause, then there is a bit of an ambiguity about what "an event" modifies: is the "event" the fragile markets getting caught off-guard, or is the "event" the unexpected drop in retail sales?

Answer E correctly uses an -ing participial phrase at the end of the sentence to modify the entire preceding clause. An -ing participial phrase at the end of a sentence can modify the subject of the preceding clause or the entire preceding clause. If an -ing participial phrase at the end of a sentence modifies the entire preceding clause, then the phrase typically presents the result of the preceding clause, as it does in this case.

Here's an example of an -ing participial phrase modifying the subject of the preceding clause.

The lion silently stalked its prey, giving no warning that it was about to attack.

Hope this helps! Good luck!

thanks spark for ur inputs

spark wrote : Also, if the absolute phrase is supposed to modify the entire preceding clause, then there is a bit of an ambiguity about what "an event" modifies: is the "event" the fragile markets getting caught off-guard, or is the "event" the unexpected drop in retail sales?

i think this is accurate .infact just after posting this question i realized this ambiguity

spark wrote : First, it seems a bit strange to call "an unexpected drop in retail sales" an "event.

i feel that had it been just one event in the previous clause ,"an event" cud have been used in that case as "an event" does fall into abstract noun category