European stock index futures fell on Wednesday following an equity sell-off in Asia, where some regional indexes hit lows last plumbed in 2009, on persistent fears that Europe's sovereign debt problems are causing a banking crisis.
The euro zone's troubles — underscored by a downgrade from Moody's for two big French banks — knocked the single currency lower, while in Asia mutual funds slashed bets on regional currencies to shore up other parts of their portfolios.
Global markets have been roiled since the end of July by the twin fears of renewed recession in the United States and Europe's protracted debt woes, which have seen Greece, Ireland and Portugal forced to take bailouts and piled bond market pressure on Italy and Spain.
"Some of the European banks may have to recapitalise their balance sheets with government assistance. It's creating a lot of nervousness and uncertainty," said Simon Bonouvrie, portfolio manager at Platypus Asset Management in Sydney.
Euro STOXX 50 index futures fell 1.1%, and DAX and CAC-40 futures also dropped more than 1%, while financial bookmakers called the FTSE 100 to open down 0.8%.
Oil eased after the International Energy Agency revised down its forecast for growth in consumption due to the struggling global economy.
Underlining the brittle state of confidence in global markets, the dollar and U.S. Treasuries rose and the yield on 10-year Japanese government bonds (JGBs) fell below 1%, as demand for assets perceived as safe havens remained high.
Japan's Nikkei share average fell 1.1% to its lowest close two-and-a-half years, while MSCI's broadest index of Asia Pacific shares outside Japan dropped 2.8%, after touching a 14-month low below levels hit during the most volatile part of August.
Hong Kong's Hang Seng index hit its lowest level since July 2009.
The MSCI index is now more than 22% below its 2011 high reached in April. A decline of 20% or more is the rule-of-thumb definition of a bear market.
U.S. index futures traded in Asia fell 1.3%, pointing to a reversal of Wall Street's gains on Tuesday.
DEFAULT, DOWNGRADES
Markets had been spooked in recent days by renewed talk among euro zone policymakers of an imminent default by Greece, prompted by the country's failure to meet the fiscal goals set out in its European Union/IMF bailout.
Greek, German and French leaders were due to hold a conference call at 1600 GMT on Wednesday.
"The conference call will at least calm nerves … and may provide 24 hours of reprieve. That's about it, though," said Sean Callow, a senior currency strategist at Westpac in Sydney.
The euro eased to around $1.3635 against the dollar, having jumped more than a cent in the previous session on news of the conference call. The single currency tumbled to a seven-month trough of $1.3499 earlier this week.
Moody's Investors Service downgraded credit ratings on French banks Credit Agricole and Societe Generale on Wednesday, citing their exposure to Greece.
Confidence in the euro zone had been further dented on Tuesday when Italy, where lawmakers vote later on an austerity package at 1800 GMT, was forced to pay the highest interest rates since joining the euro in 1999 to sell 5-year bonds.
Italy is a particular concern because, while Europe's bailout fund can cope with rescuing smaller, peripheral nations, it lacks the financial firepower to save the euro zone's third largest economy.
Europe's woes drove investors to seek shelter in the dollar, which rose 0.5% against a basket of major currencies , while the yield on 10-year Treasury notes fell to 1.965 percent .
The Australian dollar fell 1% and there were similar falls for the Indonesian rupiah and Malaysian ringgit , as mutual funds closed positions in Asian currencies that have long been outperformers.
"People are taking profits from whatever assets they have profits to take on," a Japanese bank trader said.
CREDIT FREEZE
The exposure of European banks to sovereign debt has raised fears of a freezing of credit markets in a re-run of the panic that gripped the financial sector after the collapse of Lehman Brothers in late 2008.
Data from the Institute of International Finance this month showed European banks have 3 trillion euros invested in sovereign debt, or 8% of their total assets.
In a measure of the alarm in Washington, Treasury Secretary Timothy Geithner will take the unprecedented step of attending a meeting of EU finance ministers in Poland on Friday.
Benchmark 10-year JGB futures gained 0.16 point to 142.73, with the 10-year yield easing 1 basis point to 0.990%.
"People are hesitant to sell bonds because they think it will be hard to solve the fundamental problems of the euro zone," said a trader at a Japanese bank.
Reflecting the gloomy outlook for the developed world, the Asian Development Bank on Wednesday trimmed its 2011 and 2012 growth forecasts, while noting the region's emerging economies were showing resilience.
Expectations of sagging growth hurt commodities that are dependent on industrial demand, as did the stronger dollar, which makes assets priced in the U.S. currency more expensive for holders of other currencies.
U.S. crude oil fell 1.6% to $88.72 a barrel, while Brent crude eased 0.5% to $111.30. Copper weakened 1% to $8,680 a tonne.
