London: A selloff in global stocks gathered pace on Friday, reflecting mounting concerns the US 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.
US stock index futures pointed to a sharply weaker open for equities on Wall Street, a day after the Nasdaq shed more than 5% and the S&P 500 tumbled 4.5% on rising recession fears.
Futures for the S&P 500, the Dow Jones and the Nasdaq 100 were down by between 1.4 and 1.5%.
A short selling ban imposed on financial stocks by some European stock markets last week has 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% and leaving the battered sector on course for a fourth straight week of declines.
“There has been a panic about European banks. European governments are guaranteeing European banks, but if the governments are not stable themselves, that means the banks aren’t stable,” said Lothario Mendel, chief investment officer at Octopus Investments, which manages $4 billion.
Worries about a European banking crisis kept the euro under pressure and it was last down 0.1% against the dollar at $1.4310.
The MSCI world equity index was down 1.4%. It has matched the losses in European stocks since the start of the month, with $1.4 trillion being wiped off valuations on Thursday and early on Friday -- equivalent to the size of the Spanish economy.
“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.”
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% from peak to trough, implying a 50% 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 US 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% so far this month -- its best month since September 1999 -- benefiting from a deluge of safe-haven flows.
Oil prices fell, with Brent crude extending losses on renewed expectations of weak demand from the world’s top oil consumer after a slew of lacklustre US data.
Brent fell as low as $105.06 a barrel, and has lost more than 9% this month, the worst slide since a near 15% drop in May 2010.
A string of data on Thursday revived concerns the United States could be heading for another recession, led by a sharp drop in factory activity in the US Mid-Atlantic region to its lowest level since March 2009, which stunned investors.
An unexpected fall in existing US home sales in July and a bigger-than-expected rise in new claims for jobless benefits in the latest week also added to a fresh bout 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.
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.