World stocks hit 8-week lows while the yen raced to 18-month peaks versus the dollar on Monday as fears about credit-related losses at financial firms prompted investors to reduce bets on risky trades.
Oil prices retreated from last week's record high near $99 and gold slipped in tandem, weighing on emerging market assets and oil companies who are heavyweights in European stocks.
Fresh concerns about further losses linked to the fallout in the U.S. subprime mortgage sector deepened over the weekend after Britain's Sunday Telegraph newspaper reported HSBC would take a new $1 billion hit to results this week.
The credit crunch, which started in August, has worried consumers and threatened to weaken corporate profits and derail growth in the world's largest economy.
Fears of more misery in the financial sector also triggered broad unwinding of carry trades, where investors had sold the low-yielding yen to invest in higher-yielding assets.
There's a possibility of further write-downs to come and that is when you start to get the uncertainty in the market. The market hates uncertainty more than war or famine, said Henk Potts, equity strategist at Barclays Stockbrokers.
MSCI main world equity index was down 1 percent at 8-week lows. It has eroded this year's gains after hitting an all-time high earlier this month but is up around 9 percent since January.
The FTSEurofirst 300 index was down 0.2 percent, also at eight-week lows. U.S. stock futures had been pointing to a firmer open on Wall Street but moved lower on reports of a fire in east London.
London police said there was nothing to suggest the blaze was anything but a fire.
The dollar fell as low as 109.17 yen, while it rose from last week's record lows against the euro and a basket of major currencies.
Along with a constant drip of credit-related problems simmering in the background, the yen's recent ascent has been part of a broad retrenchment in risk amidst concern over the impact on global growth of multi-decade highs in many currency pairs and asset prices, Bank of New York said in a note.
Weakness in the dollar and higher volatility in major currencies is expected to be a focal point when finance ministers and central bank governors from the Group of 20 economies meet in Cape Town at the weekend.
The December Bund future was down 6 ticks.
STERLING LENDING RATES HIGHER
There was some renewed pressure on money markets, with three-month and overnight sterling interbank lending rates hitting one-week highs at their daily fixing.
The renewed focus on banking sector exposure to asset backed securities and leveraged loans is again putting pressure on money market liquidity, Bank of Scotland Treasury said in a note to clients.
While Libor settings have not, as yet, moved up materially, there is a clear bid to instruments eligible with central banks as repo collateral while the ABCP market continues to shrink.
Investors are starting to fret over a deteriorating economic growth outlook as leading indicators slip across the developed world. This decline is, of course, in part driven by the tightening in credit availability.
The iTraxx Crossover index, the most widely watched indicator for European credit market sentiment, widened 6 basis points to 382 bps. Emerging sovereign spreads widened 3 bps while emerging stocks fell 2.5 percent.
U.S. light crude was down 1.3 percent at $95.06 a barrel after Saudi Arabia said on Sunday OPEC would discuss boosting oil output at an upcoming meting to cool surging prices. Gold fell to $814.60 an ounce, off last week's 28-year peak.
(Reporting by Natsuko Waki; additional reporting by Amanda Cooper)