The price of oil plunged yesterday as fears of a global slowdown amid escalating sovereign debt crises continued to mount.
But as oil fell by more than US$4 a barrel, the price of gold set a record as it climbed above $1,700 a troy ounce for the first time as investors rushed for a haven as uncertainty rattled market sentiment.
The US's Dow Jones Industrial Average opened down by 2.7 per cent in its first trading since Standard and Poor's downgraded the country's credit rating on Friday. European markets also fell sharply.
"Markets have lost confidence in the economic recovery and policymakers. This is increasing the risk of bringing about a self-fulfilling prophecy, with markets driving down the economy," said Robert Subbaraman, the chief economist for Asia at Nomura.
Stock markets from New York to Shanghai tumbled yesterday despite pledges from the European Central Bank (ECB) on Sunday to intervene and buy Italian and Spanish debt.
"Sentiment is still fragile and markets are going to continue to need comfort that the sovereign debt crises will not only be faced in terms of concrete plants but also implementation, for both US and European debt," said Richard Hunter, the head of UK equities at Hargreaves Lansdown in London.
Crude on the New York Mercantile Exchange dropped near an eight-month low to $84.09 in the wake of Standard & Poor's decision to lower the US's rating to "AA plus" from "AAA" for the first time in the country's history. Brent, the European benchmark, shed more than 3 per cent to hit $105.79 a barrel, its lowest since June.
A gloomy economic outlook and waning consumer confidence could further push the price of oil down, warned Ehsan Ul Haq, a senior market consultant at KBC Energy Economics.
"Some drivers feel their bank accounts are not full and they are driving less," he said. "The downgrade also means, with stock markets going down, we might see more demand destruction."
Gold for immediate delivery surged 2.6 per cent to about $1,700 a troy ounce. The yellow metal earlier rose 3.1 per cent, the most since November 4, to an all-time high of $1,715.75. The Swiss franc, considered a traditional haven, climbed to an all-time high against the dollar. The dollar dropped to as low as 74.85 Swiss centimes before trading at 76.26.
US futures declined with the S&P 500 Index trading 2.3 per cent lower at 1,171 ahead of the opening bell.
London, Paris and Frankfurt were all trading lower as the benchmark Stoxx Europe 600 Index lost 2 per cent to 233.880 points.
Both Japan's Nikkei Stock Average and Hong Kong's Hang Seng Index dropped 2.1 per cent, respectively, yesterday even as Yoshihiko Noda, Japan's finance minister, sought to reassure the markets when he said confidence in US treasuries and the dollar was unshaken after the downgrade.
Finance officials from the G7 industrial countries issued a joint statement on Sunday saying they would remain in close contact and work together to ensure stability.
US treasuries climbed, sending the benchmark 10-year yield down 8 basis points to 2.48 per cent yesterday.
"It is in everyone's interest for there not to be a huge sell-off in US treasuries because a big rise in the long-term interest rates in the US can cause world economies to weaken a lot more and potentially go into recession again," Mr Subbaraman said. "During market turmoil, part of policy among central banks is to ensure that the US bond market doesn't have a crisis either."
All Gulf bourses ended on a lower note yesterday except Abu Dhabi, which made a small gain.
Stocks listed on the Dubai Financial Market slid 0.7 per cent to 1,473.07 points, while the Abu Dhabi Securities Exchange General Index added 0.3 per cent to 2,612.80.
Elsewhere in the region, Kuwait's measure slipped 0.2 per cent to 5,956.40 while Bahrain's measure lost 0.1 per cent to 1,274.69 and Oman's index was down 0.8 per cent to 5,604.92. The Saudi Tadawul All-Share Index was down 0.3 per cent to 6,057.79.
"Volatility is the order of the day," said Rami Sidani, the head of Middle East investment in Dubai for the asset management firm Schroders.
"It is difficult to predict what is going to happen now with all this uncertainty while markets are expecting intervention from politicians to restore confidence and stability."