World stocks slid to their lowest since Sept 2009, the euro eyed four-year lows and U.S. stock futures pointed to sharp falls on Wall Street on Tuesday, on euro zone banking worries and geopolitical risk in Korea.
The central bank takeover of a small Spanish lender at the weekend reminded investors that the world is only just recovering from a banking crisis, following weeks of anxiety over how to stop the Greek debt crisis from spreading.
Markets tumbled in a catch-up move following holidays in many European countries on Monday, with investors seeming to have lost faith in the euro zone's recent 750 billion euro markets stabilisation package.
"There now appear to be deeper-rooted misgivings about the health of the global economy," said Owen Ireland, analyst at ODL Securities.
"This morning's dramatic falls may keep money out of the markets for a while until we see a semblance of order return."
Across the globe, North Korea threatened military action if the South continued to violate its waters off the west coast, further stoking tension on the peninsula after the sinking of a south Korean warship.
Global stocks as measured by MSCI fell 2 percent to their lowest since early Sept 2009, while the more volatile emerging stocks index dropped over 3 percent to 8-/2 month lows.
U.S. stock futures fell more than 2 percent, indicating a sharp decline on Wall Street, and the pan-European FTSEurofirst 300 index of top shares slid more than 3 percent to nine-month lows.
The euro dropped over 1 percent below $1.22, hovering above recent four-year lows, and slid more than 2 percent against the yen.
SAFE HAVENS
The sell-off has benefited U.S. and other assets seen as a safe haven from the storm spreading across southern Europe. German Bund futures hit a record high at 129.55, while 10-year yields were at their lowest ever.
The dollar rose over 1 percent to 87.28 against a basket of currencies and 10-year U.S. Treasuries jumped 24/32 to 103-11, yielding 3.1091 percent.
The Federal Reserve will watch the U.S. economy's progress through autumn and into 2011 as it decides how long it will hold interest rates at ultra-low levels, St. Louis Federal Reserve Bank President James Bullard said in an interview with Reuters Insider television.
Oil fell more than $2 a barrel to $67.87 but spot gold steadied at $1,192.10.
Meanwhile, funding conditions for banks have been tightening, with institutions in the United States increasingly reluctant to deal with firms with large exposure to Europe.
Three-month dollar LIBOR rates rose to their highest since late July 2009.
"If a US$1 trillion-equivalent bail-out did not finally turn sentiment, I struggle to see what can," said RBS strategist Tim Ash in a client note.
"We are finally beginning to see contagion…globally, with commodity prices just beginning to crack."
