Global markets were left reeling on Monday as nervousness about the financial sector’s outlook compounded worries about a deepening worldwide recession.

The sell-off in financial stocks gathered momentum – driving stock indices to multi-year lows – after confirmation of a huge fundraising from HSBC and news that stricken US insurer AIG would receive further aid from the US taxpayer.

AIG reported the biggest quarterly loss in US corporate history.

Concerns about the impact of deepening recession on demand for oil sent crude prices sharply lower while gold – traditionally seen as a haven in times of turmoil – retreated.

“Investors appear to be losing all faith in the markets and are busy stuffing their mattresses with the only asset that they know they can trust – cash,” said David Evans, market analyst at BetOnMarkets.

Analysts at Barclays Capital said: “Renewed equity market weakness is becoming a concern. We had hoped that the sell-off would be running into some demand by now but so far there are few signs of buyers.”

Further unsettling news for investors came from downbeat reports on manufacturing activity in the UK, eurozone and US and cemented expectations for interest rate cuts at this week’s Bank of England and European Central Bank policy meetings.

“Economic news seems to have gone past the stage of going from bad to worse, and today has seen it go from worse to diabolical,” said David Jones, chief market strategist at IG Index.

The final eurozone purchasing managers’ manufacturing index was revised down to 33.5 in February from the “flash estimate” of 33.6 – the lowest reading in the survey’s 12-year history and down from 34.4 in the previous month.

“The further weakening in manufacturing activity in February indicates that the eurozone is headed for further sharp contraction in the first quarter of 2009 and heightens already substantial pressure on the ECB to take further action to support economic activity,” said Howard Archer, chief European & UK economist at IHS Global Insight.

The UK manufacturing PMI eased to 34.7 last month from 35.8.

“The combination of falling output, weak inflation pressures and very low credit growth continue to suggest that the BoE can easily justify cutting rates [by 50 basis points] to 0.50 per cent on Thursday and aggressively pursue unsterilised asset purchases,” said James Knightley, at ING.

Better news came from a second successive improvement in the US Institute for Supply Manufacturing’s manufacturing index to 35.8 in February from 35.6 in
January.

“Today’s data releases suggest the economy is unlikely to contract as sharply in the first quarter of this year as it did in the fourth quarter of last year,” said Paul Dales at Capital Economics.

“Nonetheless, with the ISM manufacturing index still at a level consistent with a 2.5 per cent annual decline in GDP, this is not much to shout about.”

Leading equity market indices continued to plumb multi-year lows and the US Vix volatility index rose above the 50 level, widely seen as consistent with very high risk aversion.

The MSCI World stock index touched its worst level since the start of the Iraq war in March 2003. In New York, the S&P 500 dropped 4.7 per cent to its lowest close since November 1996, just above 700 points.

The pan-European FTSE Eurofirst 300 fell 5.2 per cent to its lowest close for six years and in Tokyo, the Nikkei 225 Average shed
3.8 per cent.

Research group EPFR Global said collective outflows from equity funds had accelerated last week to levels last seen in mid-October.

Credit markets weakened across the board, with the Markit iTraxx Crossover index climbing back above 1,100 basis points to within sight of the record wide around 1,120bp reached in December.

In commodities, US crude oil fell more than $4 a barrel to hover around $40, while gold reversed early gains to trade lower for a sixth successive session.

The weaker tone in equities gave a lift to government bonds. The yield on the 10-year US Treasury was down 13bp at 2.88 per cent while the 10-year German Bund yield fell 7bp to
3.05 per cent.

In the currency markets, the dollar continued to benefit from haven buying – hitting a three-year high on a trade-weighted basis – while central and eastern European currencies fell as hopes of a European Union aid package for the region were dashed at the weekend.

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