A selloff in global stocks gathered pace on Friday, reflecting mounting concerns the U.S. economy is heading into another recession and as some European lenders faced a short-term funding crunch, highlighting the risk of a banking crisis.
Nervous investors fled to the safety of core government bonds, Swiss francs and gold, which hit a record high, with many seeking to unwind holdings of riskier assets such as stocks, commodities and higher-yielding currencies before the weekend.
European shares extended steep losses from Thursday, when they suffered their biggest daily slide in 2-1/2 years, with key indexes in Britain, France and Germany deep in the red.
U.S. stock index futures pointed to a weaker open on Wall Street, a day after the Nasdaq shed more than 5 per cent and the S&P 500 tumbled 4.5 per cent fears. Futures for the S&P 500, the Dow Jones and the Nasdaq 100 were down by between 1 and 1.2 per cent.
A short selling ban imposed on financial stocks by some European stock markets last week appears to have had little impact. Shares in Europe's biggest banks fell to their lowest in more than two years on funding fears, taking the weekly fall to near 10 per cent and leaving the battered sector on course for a fourth straight week of declines.
"Funding pressures are definitely visible in the euro area because of the vicious circle between the sovereign debt crisis and the knock-on effects on the financial system due to euro zone banks' holdings of sovereign debt," said Raghav Subbarao, currency strategist at Barclays Capital.
The MSCI world equity index was down 1.3 per cent. It has matched the losses in European stocks since the start of the month, with US$1.4 trillion being wiped off valuations on Thursday and early on Friday -- equivalent to the size of the Spanish economy.
Exane BNP Paribas, in a note, said a global recession was far from priced in by financial markets. Another global slump could see corporate earnings plunge 35 percent from peak to trough, implying a 50 per cent cut to consensus earnings per share estimates.
The sharp decline in stock markets is expected to have an adverse impact on household wealth, further undermining consumer confidence and demand in coming months. Heightened uncertainty over growth could also see producers delaying decision-making, hitting global output.
Those concerns are likely to see investors cut exposure to stocks, metals and oil, and growth-linked currencies such as the Australian dollar in the coming days, unless the U.S. Federal Reserve signals more quantitative easing or European politicians take decisive actions to stem contagion risk from the euro zone debt crisis.
While investors fled stocks, spot gold hit a record high of $1,867.30 an ounce, putting it on track for the largest weekly gains since February 2009. The metal has rallied nearly 14 per cent so far this month -- its best month since September 1999 -- benefiting from a deluge of safe-haven flows.
"At the moment the market is just looking for relative safe havens," said Mitsui Precious Metals analyst David Jollie. "You can see that in the selloffs across equity markets. The strength of gold is the other side of the coin from that."
Oil prices fell, with Brent dropping to as low as $105.06 a barrel. It has lost more than 9 per cent this month, the worst slide since a near 15 percent drop in May 2010.
The drop came as a slew of data on Thursday revived concerns the United States -- the world's largest consumer of oil, could be heading for another recession.
Factory activity in the U.S. Mid-Atlantic region fell to its lowest level since March 2009, stunning investors. An unexpected fall in existing U.S. home sales in July and a bigger-than-expected rise in new claims for jobless benefits in the latest week also added to the wave of risk aversion.
Renewed fears that the euro zone debt crisis could engulf the region's financial system put pressure on short-term funding markets, forcing some European banks to pay higher rates for dollar loans and reviving memories of the dark days of late 2009 after the collapse of Lehman Brothers.
The euro edged up to $1.4377, but euro zone debt problems and worries about the financial stability of European banks were likely to check gains.
German Bund futures fell, but were still in sight of record highs as worries over a global slowdown and the euro zone debt crisis provided underlying support.