Shares tumbled on Monday despite efforts by global policymakers to stem a collapse in investor confidence after S&P downgraded the U.S. credit rating, but the euro firmed on hopes the ECB will act to stop Europe's debt crisis from engulfing Italy and Spain.
Major Asian equity markets fell by 2-5 percent, while S&P 500 futures shed 2.8 percent, indicating no respite for Wall Street.
European stock index futures fell around 2 percent before paring some losses. Financial bookmakers predicted the FTSE 100 <.FTSE> would open down 2.1 percent. <.N> <.EU> <.L>
The notion of risk-free investment has been shattered. All the big asset managers and insurers will have to rebalance their portfolios, said David Thebault, head of quantitative sales trading at Paris-based Global Equities.
Fears that the world's largest economy may be sliding back into recession, worries about a downgrade of America's prized AAA rating and Europe's debt woes combined to pummel financial markets last week in one of the worst routs since the dark days following the collapse of Lehman Brothers in 2008.
World stocks turned negative for the year on August 1, as weak manufacturing data from the United States, Europe and even China had economists hurriedly downgrading their growth estimates. Equity markets have fallen more than 8 percent further since then.
Ratings agency Standard & Poor's cut the U.S. long-term rating by one notch from AAA on Friday, capping a week that saw $2.5 trillion wiped off companies' values amid worries the U.S. economy was stalling.
Investors sought shelter in assets traditionally viewed as safe havens in times of financial turmoil, driving the Swiss franc to a record against the dollar and pushing gold to a new high above $1,714 an ounce.
There are few places you can obviously hide ... and the ones that you can hide in are doing very well. Gold is the beneficiary because there is no central bank to sell it, said Greg Gibbs, strategist at RBS in Sydney.
Finance chiefs from the G7 group of major industrial powers pledged to take whatever action was needed to stabilize markets that have been losing faith in political leaders' ability to tackle the twin debt crises in Europe and the United States.
In a statement issued after an emergency conference call, G7 countries said they were ready to take action to ensure stability and liquidity in financial markets, adding that senior officials would remain in close contact.
STOCK MARKETS FALL
Despite the G7 statement, equity markets continued to slide on Monday, following on from last week when the MSCI All-Country World Index saw its biggest weekly price fall since early October 2008, according to Thomson Reuters Datastream.
Tokyo's Nikkei <.N225> closed down 2.2 percent and MSCI's broadest index of Asia Pacific shares outside Japan fell 4.2 percent, taking its losses for the month so far to more than 12 percent.
Hong Kong's Hang Seng <.HSI> fell around 4 percent and Singapore's Straits Times Index <.FTSTI> lost nearly 5 percent. South Korea's KOSPI <.KS11> tumbled as much as 7.3 percent, prompting the stock exchange operator to briefly suspend program trading, before closing down 3.8 percent.
Traders said attention was turning to the Federal Reserve's next policy-setting meeting on Tuesday, which may signal renewed efforts to support the beleaguered U.S. economy.
Selling is not done yet, said Toshio Sumitani, a senior strategist at Tokai Tokyo. Investors are focusing on whether the Fed may hint at easing such as quantitative easing.
The dollar remained under pressure, touching a record low versus the Swiss franc below 0.7500 before pulling back to around 0.7545. Against a basket of major currencies <.DXY>, the dollar was down 0.4 percent.
But late maturity U.S. Treasuries were higher despite the downgrade, with the 10-year note up 13/32 to yield 2.52 percent, off the 10-month low of 2.34 percent hit on Friday but well below the high for the year of 3.77 percent.
It's strange that whenever there's a crisis, the money goes back to the United States, it doesn't make much sense, but that's how money managers operate, said Francis Cheung, managing director of China-Hong Kong strategy at CLSA.
Over the longer run, however, some fund managers like Aberdeen's Kenneth Akintewe, who helps manage $6.8 billion in Asian fixed income, see a shift in capital allocation to Asia.
Whenever we see bouts of market weakness, investors will be very keen to use those as opportunities to get their capital into these markets, he said.
EURO ZONE CRISIS
While the loss of the prized AAA credit rating the United States has held with S&P since 1941 was a huge symbolic blow, the crisis in the euro zone has presented an even bigger immediate concern for investors.
Yields on Italian and Spanish debt soared to 14-year highs last week on political wrangling and doubts over the vigor of budget cuts, raising fears that the euro zone's bailout fund for struggling members could be overwhelmed.
Clearly, the S&P downgrade is a very symbolic and historic event, Nomura Chief Global Economist Paul Sheard told Reuters Insider TV.
But really, the epicenter of this crisis, unlike 2008, is very much in the euro zone. So I think the markets will be focusing very much on what the euro area policymakers will do over the coming weeks.
Following a rare Sunday conference call by the ECB's governing council, a euro zone monetary source said the central bank would intervene significantly to protect Italy and Spain from the debt crisis, indicating it would buy government bonds of the euro zone's third and fourth biggest economies.
A statement from the ECB said it would actively implement its bond-buying programs.
Yields on Spanish and Italian 10-year government bonds fell in early Monday trade.
The euro briefly climbed as high as $1.4432 on the news, up more than a cent from late New York levels on Friday and a long way from last week's lows around $1.4055, and was later trading around $1.4320.
The G7 and the ECB didn't prevent investors from pulling out from riskier assets, but I think the ECB will buy substantial amounts of Italian and Spanish debt, providing some confidence to the jittery markets, said Osamu Takashima, chief FX analyst at Citibank.
Gold, which has risen around 20 percent so far this year, notching up a succession of records along the way, hit another all-time high of $1,714.79 an ounce.
But commodities tied to economic growth fell, with London copper falling below $9,000 a tonne and U.S. crude oil futures falling 4 percent to $83.45 a barrel.
Troubles in Europe are also undermining markets. Progress in dealing with Europe sovereign debt issues is painfully slow, said Natalie Robertson, a commodities strategist at ANZ.
(Additional reporting by Blaise Robinson in Paris, Ian Chua in Sydney, Adrian Bathgate in Wellington, Ayai Tomisawa and Antoni Slodkowski in Tokyo, Umesh Desai in Hong Kong, Lewa Pardomuan and Swati Bhat in Singapore and Reuters Insider Television; Editing by Kim Coghill)