NEW YORK Global stock markets fell and high-yielding currencies lost value on Friday, even as central banks pumped extra cash into the financial system to help temper fears of a liquidity crisis gripping investors.
Worldwide, central banks have injected at least $326 billion into their financial systems in the past 48 hours in an effort to prevent a global liquidity crunch that has its roots in the riskiest end of the U.S. mortgage market.
In its biggest single day of temporary open market operations in nearly six years, the U.S. Federal Reserve added $38 billion in reserves in three moves, the first coming before U.S. stock markets began trading.
U.S. stocks opened sharply lower, following the pattern of steep losses in European and Asian stock indexes.
The European Central Bank added 61.05 billion euros ($83.6 billion) on Friday, less than its record-setting sum of 94.841 billion on Thursday. Asian authorities also added cash to their financial systems on Thursday and Friday.
What started as trouble with risky U.S. residential mortgages is buffeting world financial markets as the fallout hits banks globally, squeezes once ample liquidity, and threatens to damage world economic growth.
By 3:18 p.m., the Dow Jones industrial average .DJI was down 81.62 points, or 0.62 percent, at 13,189.06 -- well off its session low at 13,057.86. The Standard & Poor's 500 index .SPX was down 5.63 points, or 0.39 percent, at 1,447.46, off its session low at 1,429.74. The Nasdaq composite index .IXIC was down 20.62 points, or 0.81 percent, at 2,535.87. Earlier in the day, the Nasdaq hit a session low at 2,503.16.
"To some degree, you've got people saying things are still pretty good. We're not going into a recession," said Rick Campagna, portfolio manager at Provident Investment Council in Pasadena, California.
"But there is still an incredible amount of fear in the market, and rumors every hour it seems," he said.
World stock markets have shed over nearly 8 percent since they hit record highs only a month ago. As a result, investors rushed to buy safe-haven government bonds, unwind yen-financed carry trades, and moved to scale back expectations for interest rate rises by some major central banks this year.
U.S. benchmark 10-year Treasuries gave up early gains to trade flat, leaving the yield at 4.78 percent US10YT=RR. The benchmark JP Morgan Emerging Markets Bond Index Plus 11EMJ showed yield spreads wider by 3 basis points to 206 basis points over U.S. Treasuries.
Emergency action by central banks underlined the risk that a global liquidity crunch was more serious than anticipated.
"What we have at the moment is just an all-round sense of panic," said Marc Ostwald, bond analyst at Insinger de Beaufort in London. "Quite clearly there's a lot of deep-seated fear out there and it's going to take a while to resolve this."
Volatility across markets is hitting banks and corporations, as they have a harder time accessing the financing essential in making takeover deals.
The CBOE Volatility Index .VIX, often called Wall Street's fear gauge, shot up 10 percent to 29.84, its highest level since April 2003.
The MSCI main world equity index fell to a four-month low, off 1.91 percent, which comes on top of a 2.0 percent drop on Thursday. The MSCI Emerging Markets stock index .MSCIEF fell 3.18 percent, an eight-week low.
The pan-European FTSEurofirst 300 index .FTEU3 ended 3.04 percent lower, its biggest one-day slump since May 2003. The index is now in negative territory for the year.
U.S. regulators are scrutinizing the books of some top Wall Street brokers and investment banks for subprime mortgage losses, according to a Wall Street Journal report.
As concerns mount about more failure from U.S. subprime loans, liquidity has become tight across markets even as central banks inject extra cash into banking systems.
"(Action by central banks) signaled that a severe credit crunch represents an imminent risk, and a greater one than the market had anticipated," brokerage Tullet Prebon said in a research note.
Dollars were in especially short supply on Friday with deposit rates for tomorrow/next delivery hitting 6-1/2 year highs above 6 percent. This compared with the benchmark federal funds rate target of 5.25 percent.
European government bonds rallied on a safe-haven bid. The September Bund future settled up 32 ticks FGBLU7.
Investors cut bets on ECB interest-rate rise expectations in the face of market uncertainty. The market prices in a 50 percent chance of the ECB raising rates to 4.25 percent in September, compared with nearly 100 percent last week. There is also a 98 percent chance of a Fed rate cut priced in by end-September.
"The concerted efforts on the part of central banks to restore confidence and prevent the short-term capital markets from seizing up reflects their concern at the worst liquidity crunch since 1998," JP Morgan said in a note.
"Should the central banks fail in their efforts and short-term refinancing pressures remain, then it won't be many days before we are likely to see the Fed respond with an outright easing in the price at which it extends credit."
In currency trading, the dollar was up 0.06 percent at 118.25 yen JPY=, compared with 118.18 late Thursday in New York, while the euro EUR= was up 0.17 percent at $1.3694, still well below a record high of around $1.3850 hit last month. The high-yielding New Zealand dollar NZD= fell 0.56 percent against the greenback.
U.S. crude oil losses were cut $0.03 at $71.56 a barrel. Spot gold rose to $673.10 from Thursday's $661.20 XAU=.
(Additional reporting by Emelia Sithole in London)