Stock markets plunged on Tuesday and the Swiss franc held near a record high as investors dumped riskier assets in a global rout triggered by fears that political leaders are failing to tackle debt crises in Europe and the United States.
Major indexes across Asia tumbled between 2 and 7%, following a drop of more than 6% on Wall Street on Monday in the first trading session since the historic downgrade of the United States' AAA credit rating by Standard & Poor's.
S&P futures fell more than 3% at one point on fears that the fallout from the downgrade could help push the U.S. economy back into recession. By midday futures were down 2.1% ahead of the European market opening.
The panicked flight-to-safety lifted gold to the latest in a string of record highs, boosted the Swiss franc and the yen and lifted Japanese government bonds and, ironically, U.S. Treasuries — the asset directly affected by the downgrade.
"We have been cautious about the unfolding events in Europe for some time and are concerned about China slowing more than what is priced into the market," said Alex Hill, co-founder of Singapore-based hedge fund Tantallon Capital, which manages more than $300 mln in assets.
"The macroeconomic picture outside of Asia is bleak and Asia's ability to remain immune is doubtful in the extreme."
MSCI's All-Country World Index has fallen about 14% so far this month, wiping around $3.8 trln off company values.
The worsening market turmoil puts significant pressure on the U.S. Federal Reserve at its regular policy meeting on Tuesday to announce some fresh measures of support for a damaged U.S. economy.
While the U.S. downgrade late on Friday was the most obvious blow to confidence, investors have also been spooked by data suggesting the U.S. economy was stalling and Europe's ever-worsening sovereign debt crisis.
There are also concerns about China's inflation rate, which analysts fear could curb Beijing's ability to stimulate demand to offset a global slowdown.
Chinese data on Tuesday failed to offer respite, showing consumer price inflation hugging three-year highs in July.
"This is the type of data that should have prompted the PBoC to hike interest rates, but given the current turmoil in financial markets, we expect them to delay it," said Wei Yao, an economist with Societe Generale in Hong Kong.
EMOTIVE TRADING
Japan's Nikkei share average was down 3.6% and MSCI's broadest index of Asia Pacific shares outside Japan shed 4% by midday, but both were off early lows.
Australia's benchmark fell 1%, Hong Kong's Hang Seng tumbled 5.6% and South Korea's KOSPI slid 6.4%, also clawing back some initial losses.
Seoul shares slid more than 9% at one point but were supported by buying by state pension funds and other public funds. A stock exchange official said it may ban short selling of shares to stabilise markets.
"It's very emotive trading," said Simon Burge, chief investment officer at ATI Asset Management in Australia. "Fundamentals would have to deteriorate quite significantly to catch up with where share prices are."
Whilst traders in Asian markets such as South Korea and Japan reported foreign money fleeing stocks, many asset managers maintained that the region still offers the best prospects.
"From a macro, top-down perspective, we expect the relative strength of the region's fundamentals to continue to attract incremental foreign capital," said RBS Asia Pacific equity strategists in a note.
"From a sector standpoint, it still appears that the one sector standing above any other for the delicate trade-off between risk and reward is telecoms. Valuations or expectations cannot be said to be anywhere near excessive levels."
Telecoms was the least-hit sector in the MSCI Asia ex-Japan index, falling less than 3% as investors looked to defensive plays.
Financial stocks have been amongst the hardest hit globally, with some investors fearing that in a worst case scenario the debt crises on both sides of the Atlantic could prompt a repeat of the money market seizure that followed the collapse of Lehman Brothers in 2008.
"Market players are seeking emergency refuge and fleeing to safe assets," said a customer trader at a major Japanese bank in Tokyo. "In the money market, where there is heightened demand for dollars, dollar lenders are running away."
THIS TIME IT'S DIFFERENT
But while the steepling falls in equities reminded many of the shockwaves that swept through markets in the wake of Lehman's collapse, money and corporate credit markets are not yet seeing a repeat of the strains witnessed three years ago.
"The Lehman moment was based on a systemic risk to the banking sector," said Olivier d'Assier , managing director for Europe and Asia at Axioma, which provides risk models and portfolio construction tools for investors and fund managers.
"This isn't related to bad assets that the banking sector has on its books, it's related to the fact that the economic growth isn't there to support the kind of national debt levels and benefits payout that politicians have promised."
The dollar was down 0.7% at 0.7494 Swiss franc , near an all-time low around 0.7483 reached the previous day. The euro plunged to a record low of 1.0605 francs , then traded down 0.5% at 1.0651.
"The yen and the Swiss franc are drawing extremely strong demand as plunges in global shares are having a major psychological impact, forcing investors to refrain from holding risk assets," said Teppei Ino, a currency analyst at Bank of Tokyo-Mitsubishi UFJ.
The dollar was down 0.8% at 77.15 after falling to an intraday low of 77.05, not far off the record low of 76.25 yen reached in mid-March.
Gold , a traditional refuge from financial storms, hit a record above $1,753 an ounce.
JP organ said on Monday it expected spot gold to climb to $2,500 an ounce or higher by year-end, following the downgrade of U.S. debt. The U.S. bank said its previous estimate of $1,800 was "too conservative".
U.S. crude oil futures fell nearly $4, or around 4.5%, to trade around $77.60 a barrel.
But as many traders hit the sell button, Anthony Bolton, one of Britain's best known equity fund managers who now runs the firm's China Special Situations Fund , saw a buying opportunity.
"History shows that normally extreme equity market volatility as we are now experiencing should be seen as a time of opportunity rather than a time to become more defensive," he said in a statement.
