Asian stocks dropped nearly 7 per cent and commmodity-related currencies tumbled on Thursday as more evidence the U.S. economy is shrinking made investors brace for a potentially deep and lasting global recession.
After toying for several days with raising their threshold for risk by buying beaten-down shares, investors were overwhelmed by fears that far-reaching consequences from such a sharp slowdown in developed economies were still unfolding.
Wall Street institution Goldman Sachs Group Inc, which had early in the financial crisis profited on bets against the U.S. mortgage market, reportedly laid off 3,200 employees this week, and the Bank of England and the European Central Bank were expected to cut interest rates aggressively to shore up their economies.
A growing group of economists even think the Bank of England later on Thursday could lop off a full percentage point from borrowing costs in answer to critics who said the central bank had not done enough to save Britain from the worst financial shock in a generation.
"Supportive policies, valuations and positions are not enough to bring about a sustained rebound in riskier markets, as has been clear over the past year," said Jan Loeys, head of global asset allocation with JPMorgan in London said in a note.
"At best, we have seen bear market rallies that were soon overwhelmed by the reality of worsening economic conditions."
The MSCI index of Asia-Pacific stocks excluding Japan. fell 6.9 per cent after hitting a 3-week intraday high on Wednesday. The gauge has lost 53.5 per cent so far this year, exceeding the 40.7 per cent decline on the All-Country World index.
Japan's Nikkei share average slumped 5.4 per cent, led by high-profile exporters like Canon Inc and Honda Motor Co that are expected to be affected the most by a steep drop in overseas demand as consumers cut back spending.
Toyota Motor, which is set to announce quarterly results and forecasts after the close, skidded nearly 9 per cent after a newspaper said the automaker's annual operating profit would more than halve from a year earlier due to slow sales.
Hong Kong's Hang Seng index tumbled 6.4 per cent, led by a 12.8 per cent decline in Cathay Pacific after the airline warned about fuel hedging losses of $360 million which would hurt 2008 results.
Major U.S. stock indexes posted losses overnight of more than 5 per cent, as investors bet the incoming Obama administration will unlikely be able to act fast enough to avert further economic damage.
The sheer size of the burst credit bubble has made determining the economic implications difficult, and forecasts for global economic growth continued to be revised lower.
Data on Wednesday showing a sharp deterioration in the U.S. private sector jobs market and a contraction in the service sector added to the gloom.
Economists at Fitch Ratings this week lowered their predictions to reflect the biggest decline in the combined gross domestic product of Britain, the euro zone, Japan and the United States since World War II.
The euro and sterling fell against the dollar, ahead of expected rate cuts in Britain and Europe, while the yen firmed against higher-yielding currencies as fear-based trades ruled.
The euro fell to as low as $1.2842 on trading platform EBS, down more than 1 cent from the day's high of $1.2957.
The euro was down 0.9 percent against the yen at 125.75 yen, partly because a fall in Asian share prices fuelled risk aversion and gave a boost to the yen.
"We remain of the view that conditions in the real economy will weaken further, and that external demand prospects for the euro zone economy are not bright," Brian Kim, currency strategist with UBS, said in a note.
Japanese government bonds climbed as equities dropped.
The 10-year JGB future rose around 0.8 point to 138.00, having rebounded heartily from 3-month lows touched late last month.
Steepening yield curves, in which the difference increases of long-dated yields over short-dated ones, were still the trend in government bond markets, especially in Britain and the euro zone Investors expect that central bankers in those areas will have to catch up with the rate cuts in the United States.
Since the bankruptcy of Lehman Brothers in mid September, the euro zone 2-year to 10-year spread has widened by 100 basis points, UK by 147 basis points and U.S. by 74 basis points. Most of the steepening was because of short-end yields tumbling as investors priced in rate cuts.
U.S. crude oil futures were down slightly, with the December contract trading at $64.47, after falling 7 per cent on Wednesday when a U.S. government report showed gasoline inventories growing as demand in the world's top consumer slowed further.