Asian stocks fell 4% on Monday and the yen surged to a 2-year high against the euro as investors doubted the scattered European response to the financial crisis and the $700 bln U.S. bank bailout could prevent a global recession.
The need for stability drove up U.S. and Japanese government bond prices and increased demand for yen and Swiss francs, especially after a report on Friday showed the U.S. economy shed the most jobs in September in 5-½ years.
Oil prices fell around to around $92 a barrel dragging down prices of metals and grains, on expectations damage from impaired financial systems in developed economies would almost certainly cause them to shrink.
JPMorgan and UBS economists have already predicted the world economy would slip into a recession next year, using a common definition of annual growth in global gross domestic product at or below 2.5%.
Saul Eslake, chief economist with ANZ Bank in Sydney, does not predict a world recession but sees it as a growing risk.
"The fact that a lot of emerging market economies run current account surpluses insulates them to a degree from the consequences of what's going on in the global financial system," he said.
"But they have real economy leakages through their exports and that means they have not decoupled and never were."
Japan's Nikkei share average fell 3.2% to the lowest since May 2004. Sectors that derive their revenues mainly from exports, such as electrical equipment, machinery and auto makers, led the index lower.
The MSCI index of Asia-Pacific stocks outside Japan slid 4.5% to the lowest since June 2006.
Hong Kong's Hang Seng index was down 2.65%, with shares of China Construction Bank and HSBC paving the way lower.
"There's just nothing positive out there. Figures are bad in the States, Europe's bad, Japan's bad and China's probably slowing," said David Spry, research manager at broker FW Holst in Melbourne.
NO UNITY IN EUROPE
South Korea's KOSPI was down 3.7%, led by shares of Samsung Electronics Co Ltd and POSCO, the world's fourth-largest steelmaker.
Korea's markets have been one of the hardest hit by a wholesale move by foreign investors away from perceived risk in Asia. The country's growing current account deficit has turned off investors, and news local banks were having trouble securing foreign-currency loans added to negative sentiment on the region's fourth-largest economy.
The won fell as much as 5% to a 6-½ year low before recovering on what dealers suspected was intervention by monetary authorities.
Korea had $198 mln in net equity capital outflows last week, relatively light compared with prior weeks, while Taiwan-related funds, a former hotspot for investors, saw its 17th consecutive week of outflows, according to Nomura.
China is the only mutual fund market in Asia that had two straight quarters of net inflows from funds, with $3.9 bln in new money in the third quarter, the firm said.
The dollar has partly been the beneficiary of a move by institutions and investors to cut the amount of risk in their portfolio. As a result, the euro fell 0.9% to $1.3635 after earlier falling as low as $1.3610.
The euro was also down 0.9% at 141.50 yen the lowest since May 2006. Against the yen, the dollar dropped 1.5% to 103.69 yen
Europe's scattered response to the financial crisis enveloping the region also weighed on investors.
Germany gave blanket bank deposit guarantee on Sunday to prevent panic as officials clinched deals to rescue Germany's Hypo Real Estate — after an initial bailout failed — and recapitalise two other European banks.
Divisions in how European leaders think best to approach the financial crisis were clearly on display. Italian Prime Minister Silvio Berlusconi said on Sunday that Italy would revive the idea of a common bank bailout fund at a meeting of finance ministers on Monday, only a day after the leaders of Europe's four biggest economies — Germany, France, Britain and Italy — decided against a coordinated bank rescue.
The 10-year Japanese government bond future was up 0.6 point at 138.27, rising for a third day. The yield on the 10-year U.S. Treasury note which moves in the opposite direction of the price, fell to 3.55% after earlier dropping to 3.52%, down from 3.60% late on Friday.
