Fears of global liquidity crisis grip markets

By Daniel Bases

NEW YORK (Reuters) - 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.