STOCKS on major markets fell and crude oil prices slumped $2 a barrel yesterday after data showed that Chinese, European and US manufacturing activity had slowed further, a day after the US Federal Reserve extended its monetary stimulus programme.
Ratings agency Moody's downgraded 15 of the world's biggest banks yesterday, lowering credit ratings by one to three notches to reflect the risk of losses they face from volatile capital markets activities.
The dollar rose against the euro and yen yesterday after the Fed disappointed investors hoping it would opt for a more aggressive policy.
Business activity across the euro zone shrank for a fifth straight month in June and Chinese manufacturing contracted, while weaker overseas demand slowed US factory growth, surveys showed yesterday.
The data darkened the outlook for the world economy, adding to fears that Europe's debt crisis and slower growth in the US and Asia may cause downturns worldwide.
"The genesis is Europe and it's starting to flow through everything now. Business has slowed down," Stephen Massocca, MD at Wedbush Morgan in San Francisco, said.
Spain's medium-term borrowing costs spiralled to a euro-era record yesterday and independent auditors said Spanish banks may need up to ?62bn in additional capital, to be filled mostly by a bail-out.
Euro-zone finance ministers met in Luxembourg last night to discuss how to channel up to ?100bn in rescue aid to Spanish banks weighed down by bad debts from a burst property bubble.
"We have already started working on the design of the aid with the European Commission, the European Central Bank and the International Monetary Fund," Spanish Economy Minister Luis de Guindos said as he arrived. "We will present the request in the next few days."
US stocks slid sharply last night, posting their worst day in three weeks, with the Dow Jones sinking 2%, and the S&P 500 down 2,23% on weak economic data from China and Europe after the Fed cut its growth forecast for the US. The Nasdaq dropped 2,44%, and MSCI's global equity index 1,2%.
The S&P gauge of 24 commodities slid to the lowest since November 2010 and is down more than 21% from a closing high in February.
Oil dipped below $80 a barrel for the first time in eight months and gold fell 2,5%.
Earlier in the US session, gold was on the brink of turning negative for the year. It was $1564,40/oz at midday, having earlier hit a $1563,88/oz low - a long way off the record high of $1920,30 /oz hit last year.
In Europe, preliminary manufacturing and service sector data across the 17-nation euro zone showed the downturn in the region was becoming entrenched as falling new orders and rising unemployment hit business confidence. The survey data also showed Germany's private sector shrank in June for the second month running, with manufacturing hitting a three-year low.
A similar survey of private sector activity in China, compiled by HSBC, found its factory sector had shrunk for an eighth successive month in June on weaker demand for exports.
Economic growth in China is widely expected to have slowed for a sixth straight quarter in April through June, as the country feels the effect of the euro debt crisis and property controls weigh on domestic demand.
In the oil market, Brent crude was down to $90,67 a barrel, while US crude traded down $2 to $79,45 a barrel.
Spain's medium-term borrowing costs spiralled to a euro-era record at an auction yesterday.
Spanish bond yields were down, with 10 -year government bond yields 23 basis points lower at 6,53%, having risen to almost 7,3% last week.
In the US, bond yields were down as well. Benchmark 10-year treasuries were last up in price to yield 1,62%, down from 1,65% late on Wednesday.
Spain's banks would need as much as ?62bn in capital to withstand a worst-case economic scenario, according to two consulting firms hired by the government to conduct stress tests.
Oliver Wyman estimated the banks would need ?51bn -?62bn should Spanish gross domestic product shrink by 6,5% and house prices drop 60% from the peak.
Roland Berger Strategy Consultants said Spanish banks would need ?51,8bn in those conditions.