Asian shares and the euro fell to seven-week lows on Friday as European officials failed to soothe investor fears that the euro zone's debt crisis could trigger a damaging credit crunch if funding costs run out of control.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> slumped as much as 1.6 percent to its lowest level since early October and was set to post a weekly loss of 5.5 percent, a fourth consecutive week of declines.
HSBC Holdings <0005.HK>, Europe's largest bank, slumped to its lowest since May 2009, dragging down the Hang Seng Index <.HSI>. Japan's Nikkei <.N225> closed down 0.1 percent after earlier touching a two-and-a-half-year low. <.T>
European shares were expected to fall for a seventh straight session, with financial spreadbetters calling Britain's FTSE 100, Germany's DAX <.GDAXI> and France's CAC-40 <.FCHI> to open down 0.2-0.4 percent.
With no convincing progress in sight on solving the euro zone debt crisis, investors were shunning riskier assets and selling those normally perceived as safe, such as gold and Japanese government bonds, to raise cash or cover losses.
Risk appetite is very low and fear factor is very high, said Markus Rosgen, head of Asia strategy at Citigroup.
Basically people are fearful and whenever people are fearful, equities tend to be cheap. What people are doing is where they have profits, they are taking profits. Gold is one area where they have profits.
France and Germany agreed on Thursday to stop bickering openly about whether the European Central Bank should do more to rescue the euro zone from a deepening sovereign debt crisis.
French President Nicolas Sarkozy also said Paris and Berlin would circulate joint proposals before a December 9 European Union summit for treaty amendments to entrench tougher budget discipline in the 17-nation euro area.
But with market seeking actions rather than rhetoric, sentiment remained highly risk-averse as Germany stood firmly opposed to the creation of joint euro zone bonds or boosting the ECB's role in solving the fiscal problems of individual euro zone members.
Disappointment that officials continue to tinker with the trivial rather than consider the bold pushed risk appetites lower and increased the downside risks to the outlook for the European sovereign debt crisis, said Besa Deda, chief economist at St. George Bank in Sydney.
FUNDING WOES DEEPEN
Funding stresses for European banks escalated, with the cost of swapping euros into dollars in the currency swap market reaching three-year highs of 148 basis points on Thursday.
The ECB is looking at extending the term of loans it offers banks to 2 or even 3 years to try to prevent the euro zone crisis precipitating a credit crunch that chokes the bloc's economy, people familiar with the matter say.
The euro fell to a seven-week low against the dollar of $1.3303 on Friday.
Reduced risk-taking weakened commodity currencies, sending the Australian dollar down 0.3 percent to $0.9687, just above seven-week lows of $0.9664 touched on Wednesday.
A day after weak demand for a German bond auction shocked global markets and fueled fears the crisis may be hurting Europe's economic powerhouse, the closely-watched German Ifo business climate index on Thursday bucked expectations and showed a rise for November for the first time since June.
German government borrowing costs stayed elevated, with 10-year Bund yields rising as high as 2.14 percent on Thursday -- the highest in nearly a month.
The premium for Portuguese bond holders over Bunds rose on Thursday after Fitch downgraded Portugal's rating to junk status.
Bearish sentiment spilled over to Asian credit markets, with
spreads on the iTraxx Asia ex-Japan investment grade index widening by 5 basis points on Friday.
The benchmark 10-year Japanese government bond yield rose 5 basis points to 1.03 percent and 10-year futures plunged over a half point to their lowest since early November.
Selling in Bunds spooked some investors, raising questions over whether it was safe to hold low-yielding JGBs, a Japanese bank trader said. It seems some money is flowing out of yen bonds into the dollar.
Spot gold fell 0.3 percent to below $1,690 an ounce on Friday, nearing a one-month low of $1,665.88 hit on Monday.
(Additional reporting by Ian Chua in Sydney and Akiko Takeda in Tokyo; Editing by Alex Richardson)