Asian stock markets plunged on Tuesday and the Swiss franc held near a record high as investors dumped riskier assets in a global rout triggered by fears that political leaders are failing to tackle debt crises in Europe and the United States.
Major indexes across the region fell between 4 and 9 per cent, following drop of more than 6 per cent on Wall Street on Monday in the first trading session since the historic downgrade of the United States’ AAA credit rating by Standard & Poor’s.
S&P futures fell more than 3 per cent at one point on concerns the downgrade could further erode already weak business and consumer sentiment, potentially pushing the U.S. economy back into recession.
The panicked flight-to-safety lifted gold to the latest in a string of record highs, boosted the Swiss franc and the yen and lifted Japanese government bonds and, ironically, U.S. Treasuries – the asset directly affected by the downgrade.
“We are looking at markets pricing for some sort of financial crisis. I think we are at a critical period now,” said Warren Hogan, chief economist at ANZ Banking Corporation.
“The declines in the equity market globally are around 15 to 20 per cent, that’s still an order of magnitude regarded as a correction. If we see another 5-10 per cent decline in equities we are in slump territory indicative of some sort of financial seizure.”
While the U.S. downgrade late on Friday was the most obvious blow to confidence, investors have also been spooked by data suggesting the U.S. economy was stalling and Europe’s ever-worsening sovereign debt crisis.
There are also concerns about China’s inflation rate, which analysts fear could curb Beijing’s ability to stimulate demand to offset a global slowdown.
Chinese data on Tuesday failed to offer respite, showing consumer price inflation hugging three-year highs in July.
“Now is not the time to talk about inflation. China must be on serious watch for policy over-tightening under the current global circumstances,” said Dong Xian’an, chief economist at Peking First Advisory.
Japan’s Nikkei share average fell 4.4 per cent and MSCI’s broadest index of Asia Pacific shares outside Japan shed 6 per cent.
Stocks were sold off across the board, with even defensive sectors in the MSCI Asia ex-Japan index such as telecoms and utilities dropping more than 4 per cent.
Australia’s benchmark tumbled 4.5 per cent to take its decline from a recent April peak to more than 20 per cent. Hong Kong’s Hang Seng fell 7.3 per cent and South Korea’s KOSPI tumbled 8.4 per cent.
A stock exchange official in Seoul said it may ban short selling of shares to stabilize markets.
“It’s very emotive trading,” said Simon Burge, chief investment officer at ATI Asset Management in Australia. “Fundamentals would have to deteriorate quite significantly to catch up with where share prices are.”
Financial stocks have been amongst the hardest hit, with some investors fearing that in a worst case scenario the debt crises on both sides of the Atlantic could prompt a repeat of the money market seizure that followed the collapse of Lehman Brothers in 2008.
“Market players are seeking emergency refuge and fleeing to safe assets,” said a customer trader at a major Japanese bank in Tokyo. “In the money market, where there is heightened demand for dollars, dollar lenders are running away.”
The dollar fell to an all-time low near 0.7480 Swiss francs , while the euro plumbed around 1.0640 francs . They later traded around 0.7510 and 1.0650 francs respectively.
Against the yen, the dollar slipped to around 77.25 from above 80 yen just last week, while the euro slid to around 109.55 yen from recent highs around 114.00.
Gold , a traditional refuge from financial storms, hit a record above $1,742 an ounce.
JP Morgan said on Monday it expected spot gold to climb to $2,500 an ounce or higher by year-end, on very high volatility, following the downgrade of U.S. debt. The U.S. bank said its previous estimate of $1,800 was “too conservative”.
U.S. crude oil futures fell nearly $5, or around 6 per cent, to trade around $76.50 a barrel, the lowest since September 2010.