Stocks slipped and the dollar tumbled to historic lows on Friday as the Federal Reserve's warning on the health of domestic banks raised concerns over a US recession, driving oil and safe-haven gold to record peaks.
Fed Chairman Ben Bernanke said on Thursday some small US banks could fail during the current market turmoil stemming from the fallout in US subprime mortgages, in remarks which fanned expectations for an aggressive interest rate cut in March.
However Bernanke also acknowledged inflation could complicate the central bank's effort to spur the economy, which weighed on risky assets.
"Throughout the week, there has been a continual flow of disappointing US economic news and earnings," said David Evans, market analyst at BetOnMarkets.com.
The FTSEurofirst 300 index was down 0.1 per cent on the day, having hit a one-week low earlier in the day. The MSCI main world equity index fell a quarter per cent.
The dollar fell to a three-year low of 104.23 yen while it hit record lows of $1.5238 per euro and tumbled to historic troughs against a basket of major currencies.
Interest rate futures markets are pricing in an almost 40 per cent chance of the Fed lowering the cost of borrowing by three-quarters of a percentage point in March.
"Mr Bernanke identified the main economic risks as the credit crunch, employment and the housing market. Don't expect good news from any of these directions soon. The rise in inflation complicates the Fed's job. However, growth worries are in the driving seat," BNP Paribas said in a note to clients.
Surging gold, oil
Gold, a safe-haven asset which offers an inflation hedge, rose as high as $975 (Dh3,578.25) an ounce, bringing gains this year to more than 16 per cent this year.
US light crude had risen to $103.05 (Dh378.19) a barrel, before eroding gains, after Ecuador shut a key export pipeline and a fire hit a major European natural gas plant.
Surging energy, commodity and food prices are fanning inflation concerns which could tie the hands of central banks keen to cut interest rates to bolster the economy. This is in turn prompting investors to buy safe-haven gold and other basic resources, creating a self-fulfilling cycle.
Emerging sovereign spreads widened 2 basis points while emerging stocks were down 0.8 per cent.
The cost of corporate bond insurance rose after Bernanke's warning, with the iTraxx Crossover index, most-widely watched indicator for European credit market sentiment, widening to 594 basis points.
The March Bund future rose 0.3 per cent, capitalising on woes in stock markets. (Reuters)
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