World stocks dived to three-year lows on Monday as investors fled to government bonds and the low-yielding yen, fearing efforts by policymakers to contain the credit crisis might not be enough to prevent a recession.
Oil fell nearly 4 percent to 8-month troughs while emerging stocks tumbled 5 percent as the fallout from the worst financial crisis in 80 years spread in Europe where three more governments were forced to offer blanket bank deposit guarantees in the face of a growing number of bank failures.
In South Korea, banks were having trouble raising foreign currency funds and the government pledged to give banks access to the country's foreign exchange reserves, the world's sixth largest at nearly $240 billion. Despite weeks of huge liquidity injection by central banks, money markets remained tight, reflecting deep-rooted reluctance by banks to lend to each other.
"We have a seriously weak and fear-driven market on our hands," said Tom Hougaard, chief market strategist at City Index.
The FTSEurofirst 300 index fell 4.2 percent while MSCI main world equity index lost 2.6 percent to its weakest level since May 2005. The index has shed 31 percent since January.
A flurry of measures by countries around the world is doing little to calm investor nerves.
Germany, Austria and Denmark followed Ireland to guarantee private deposit accounts after European leaders failed to agree on a concrete common rescue scheme at a weekend meeting in Paris.
Leaders from France, Britain, Italy and Germany and European Central Bank President Jean-Claude Trichet pledged to take all steps needed to ensure financial stability and coordinate.
The emergency summit came as the U.S. government enacted a landmark $700 billion bank bailout on Friday.
The yen surged more than 1 percent to 103.71 per dollar while the euro tumbled 0.7 percent to a 13-month low of $1.3575 . The dollar rose half a percent against a basket of major currencies.
The interbank cost of borrowing dollars for three months was indicated as high as 5.47 percent on Reuters system. This compares with market expectations for January interest rates of 1.50 percent — half a point below the current rate.
The December Bund future rose 80 ticks, drawing in funds seeking safer assets.
Emerging sovereign spreads widened 9 basis points while emerging stocks lost 5.2 percent.
U.S. light crude fell 3.8 percent to $90.34 a barrel as concerns grew but the slowing economy would choke off energy demand. Gold fell to $828.20 an ounce.
