London, Aug. 10 (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.
Before US stock markets opened, the Federal Reserve injected $19 billion of temporary reserves into the financial system on Friday — its biggest single temporary open market operation in four years and second such move in two days. In a second move on Friday, the US central bank injected another $16 billion, bringing the day's total to $35 billion.
The European Central Bank and Asian authorities also added cash to their financial systems on Thursday and Friday. What started as trouble with risky US residential mortgages, is hitting world financial markets as the fallout hits banks globally, squeezes once-ample liquidity, and threatens to damage world economic growth.
Wall Street stocks opened sharply lower on Friday but stabilised in early trade following steep drops in equities markets in Europe and Asia.
“The consequences of this situation not resolving itself are so negative that we think that market forces, along with the Fed, will make sure that they resolve themselves properly,” said David Katz, chief investment officer of Matrix Asset Advisors in New York.
World stock markets have shed over 7 per cent 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.
Emergency action by central banks, with the ECB acting for the second time on Friday, 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.”
The MSCI main world equity index fell to a four-month low, off 1.91 per cent, which comes on top of a 2.0 per cent drop on Thursday.
The FTSEurofirst index earlier hit a 4-1/2-month low and was down 2.4 per cent, wiping this year's gains out. Asia’s major stocks fell nearly 4 per cent.