Citigroup and Bank of America faced new doubts over their ability to fund their massive losses as their shares sank, while U.S. and Japanese data pointed to a deepening global recession.
The European Central Bank is expected to cut interest rates for the fourth month running as the outlook for the 16-country euro zone continues to worsen, with biggest member Germany braced for the worst year for its economy since World War Two.
Asian equities followed European and U.S. markets in a slide to multi-week lows. Once-mighty Citigroup tumbled 23 percent amid fears banks will need even more public funds to save them from collapse.
"You'd think the news on banks is baked in, but there's still a lot of headwinds," said Rich Parker, head of trading at Stanford Group in New York.
Shares in Citigroup, once the world's biggest bank but now only No. 3 in the United States, fell below $5 for the first time since a government rescue in November amid uncertainty about whether it can recover from punishing losses on toxic debts.
MASSIVE LOSS
More bad news was expected from Citigroup on Friday, when it plans to report quarterly results, six days ahead of schedule, and analysts are looking for a fifth straight multibillion-dollar loss. The bank was also widely expected to provide details of a comprehensive downsizing designed to ensure its survival.
Bank of America Corp is close to receiving billions of dollars of support from the U.S. government, a source familiar with the matter said, as it tries to digest Merrill Lynch & Co Inc, the investment bank and brokerage it bought on Jan. 1.
Merrill has billions in troubled assets — ranging from commercial real estate to subprime mortgages — that suffered during a brutal fourth quarter.
Citigroup has already been propped up with $45 billion in government funds from the Troubled Asset Relief Program (TARP), while Bank of America and Merrill have received $25 billion.
"The large banks in the U.S. are not lending, and they're desperate to conserve capital," said Dan Alpert at Westwood Capital in New York. "Banks only remain going concerns because the federal government is topping up their equity."
And there is no relief in sight warned Jamie Dimon, chief executive of rival JPMorgan Chase & Co.
"The worst of the economic situation is not yet behind us. It looks as if it will continue to deteriorate for most of 2009," he told the Financial Times. "In terms of our sector, we expect consumer loans and credit cards to continue to get worse."
The crisis finally caught up with Canada too, where Nortel Networks Corp, North America's biggest telephone equipment maker, filed for bankruptcy.
STALLED INVESTMENT
The financial crisis began in 2007, when bank lending dried up in the face huge losses in the U.S. housing market. Since then the global economy has deteriorated relentlessly and by late 2008 most developed countries were officially in recession.
Data on Thursday showed core Japanese machinery orders fell a record 16.2 percent in November to a two-decade low, in a sign the global crisis has stalled capital investment, while wholesale inflation hit a four-year low, pointing to the risk of deflation.
The global slowdown has hit Japanese factories hard, with big firms such as car maker Toyota Motor Corp and electronics firm Sony Corp slashing production and cutting jobs as export orders dry up.
Nissan Motor Co the country's third largest car maker, is set to post an annual operating loss, a company source said. It had previously forecast a profit.
The Japanese numbers followed U.S. data showing sales at retailers last month slumped 2.7 percent from November as a deteriorating economy made consumers slash spending during the key holiday period. Compared with a year earlier, sales plunged a record 9.8 percent in December.
RATE CUTS, JOB LOSSES
The data again suggested the year-long U.S. recession was deepening and could be the longest since 1981.
Unemployment has been rising as the downturn bites. Motorola said on Wednesday it was shedding 4,000 jobs, on top of cuts last year, while even the archetypal growth company Google Inc said it was laying off 100 full-time recruiters.
"The economy is staring at a very steep, downward trajectory," said Jim Demasi, a strategist at Stifel Nicolaus & Co Inc in Baltimore.
Eurozone policymakers have been slower than their counterparts in the United States, Japan and Britain to slash interest rates in the face of the gathering economic storm.
But news the German economy contracted sharply in last year's final quarter and euro zone industrial output plunged in November boosted expectations the ECB will make a deep cut on Thursday.
"Verbal guidance has been less clear over the past few weeks," said Dresdner Kleinwort economist Rainer Guntermann, who sees a 50 basis point cut. "We have to look beyond the verbal guidance and at the facts — the data flow does tell a fairly consistent picture, which is unfortunately very downbeat."
European bond markets were spooked on Wednesday when Standard & Poor's cut its credit rating on Greek sovereign debt, stoking fears downgrades to other eurozone countries could follow.
