Asian stocks sank Tuesday and the euro languished near a two-month low as investors took fright at the prospect of mass eurozone sovereign ratings downgrades after the outcome of a last chance European Union summit failed to convince markets.
Commodities steadied after a hammering in the previous session and the so-called risk currencies of big resource producers such as Australia nursed heavy losses as investors huddled in the relative safety of the dollar.
European stocks were expected to open slightly higher after sharp losses in the previous session, but concerns that the euro zone remains a long way from solving its sovereign debt crisis were likely to make any rebound modest.
Although there were hopes that Europe would stabilise after the summit last week, we are seeing fresh uncertainty as Moody's, Standard & Poor's and Fitch have all warned on Europe, said Hiroichi Nishi, equity general manager at SMBC Nikko Securities in Tokyo.
Japan's Nikkei share average fell 1.2 percent, while MSCI's broadest index of Asia Pacific shares outside Japan lost 1.4 percent. The MSCI index has lost nearly 18 percent this year and is about 23 percent off its 2011 high reached in April.
Shares in growth sensitive commodity producers were hit hard, with global miners BHP Billiton (BHP.AX) and Rio Tinto (RIO.AX) both shedding more than 2 percent, while some Asian chip makers were also sold after industry bellwether Intel (INTC.O) cut its revenue outlook.
Friday's European Union summit deal to strengthen budget discipline in the embattled euro zone had initially cheered investors, prompting a short-lived rally in riskier assets.
But on Monday the focus shifted to legal uncertainty surrounding the new pact -- which will be negotiated outside the 27-nation EU after Britain refused to join -- and the absence of an unlimited financial backstop for the single currency.
Financial bookmakers predicted London's FTSE 100 index, Frankfurt's DAX and Paris's CAC-40 would all open around 0.4 percent higher on Tuesday.
The mood darkened after ratings agency Moody's said it would review ratings of all EU member states in the first quarter of 2012, while rival Fitch said the summit had failed to provide a comprehensive solution to the debt crisis.
European shares fell around 2 percent and Wall Street slipped about 1.5 percent. S&P 500 index futures were trading flat on Tuesday, suggesting stocks may steady when U.S. markets open later.
As equity markets dived on both sides of the Atlantic on Monday, yields on Italian and Spanish debt spiked, with Italy's 10-year government bond yields crossing the 7 percent threshold widely seen as unsustainable in the longer term.
The euro fell to a 2-1/2-month low at $1.3160 on Tuesday, before steadying around $1.3185, while the Australian dollar stabilised around $1.0080 after shedding more than a cent.
The dollar was also steady, after jumping more than 1 percent against a basket of major currencies to its highest this month. Enthusiasm for the dollar pushed the yield on 10-year U.S. Treasuries down to around 2.02 percent.
The trend of euro weakness versus the dollar was expected to be reinforced by data from Europe and the United States later, principally a closely watched survey of German analyst and investor sentiment and U.S. retail sales.
Also, the U.S. Federal Reserve holds its final policy meeting for the year on Tuesday, but was not expected to take any policy action, although further easing steps are seen as likely next year.
The net effect of the data will likely be to reinforce European gloom, and highlight the divergence between U.S. and European data, said Kit Juckes, head of foreign exchange research at Societe Generale.
The concerns over Europe hit Asian credit markets, with spreads on the iTraxx Asia ex-Japan investment grade index widening 4-5 basis points, in a further sign that investors were shunning risk.
Oil and industrial metals slid on Monday, both because they are seen as riskier assets linked to economic growth expectations and because they are priced in dollars, making them more expensive for many buyers when the U.S. currency gains.
Crude was virtually unchanged on Tuesday, with the U.S. benchmark contract at $97.76 a barrel while Brent traded around $107.25. Copper slipped about 0.2 percent to around $7,590 a tonne.
Gold had dropped 3 percent on Monday as a fall below $1,700 an ounce triggered heavy technical selling -- when investors close positions because the price hits a pre-determined level. It slipped further on Tuesday, losing about 0.9 percent to $1,652.
Since hitting a record above $1,920 in September, gold has switched from a negative to a positive correlation with riskier commodities as investors' preference has shifted to the dollar as their safe-haven asset of choice.
It's all about anxiety and worry, said Nick Trevethan, senior commodities strategist at ANZ in Singapore. Gold is just getting lumped in with other markets as risky assets, not necessarily for the right reason.