Asian stocks tumbled as much as 5 percent on Friday after panic triggered the worst sell-off on Wall Street since the global financial crisis, prompting investors to slash positions and scramble for cash and government bonds.
Fears that the U.S. economy is sliding back toward recession and a recent jump in Italian and Spanish bond yields towards danger levels have driven investors to seek cover.
U.S. stock futures were slightly higher after major U.S. markets fell by 4-5 percent overnight, but employment figures due later in the day could trigger further selling if the jobs picture disappoints.
Complicating matters was that Japan and Switzerland have intervened this week to weaken their currencies, which were considered the safest in the developed world. That has caused some safety-seeking investors to think twice about stashing money there when financial market volatility is spiking.
So far, retail investors were participating in the heavy selling but institutional equity investors in Asia were not completely liquidating their positions, instead continuing to cut riskier bets and protect their portfolios.
"What you're seeing is a shakeout of all the money that was put to work in the hope that 2011 turns out like last year, where you saw a nice bounce around the same time," said a Hong Kong-based multi-strategy hedge fund manager.
"That could still happen but with the losses that people have already taken this year, looks like no wants to take the risk. It's about preserving capital now."
Japan's Nikkei share average fell 3.4 percent to the lowest since the week following the country's massive earthquake and tsunami in March.
The benchmark MSCI index of Asia Pacific stocks outside Japan was down 3.8 percent , with investors selling across the sectors, whether they are defensive or cyclical. The index is on course for the biggest weekly drop since May 2010, when the European debt crisis was flaring up.
"Clearly, it's just a knee-jerk reaction to what's going on," said Michael Heffernan, senior client advisor with Austock Group in Australia. "We're going down simply on the fear that Italy can't pay its debts."
Within Asia, markets with high trade exposure to the West and reliance on commodities looked particularly vulnerable.
Taiwan, where the technology sector makes up about half of the equity market capitalization and depends heavily on exports to developed countries, is a weak point in Asia.
The benchmark stock index in Taiwan led Asia, falling 5 percent .
Europe, where overloaded national balance sheets have bedeviled politicians struggling to grasp the implications, is currently in the eye of the storm.
Italian and Spanish bond yields have kept rising and German bond yields falling, widening spreads the most since the euro was born and causing deep-seated fears about what else policy makers can do to keep the euro zone together.
The European Central Bank resumed buying government bonds after a four-month break and announced new longer-term funding for liquidity-starved banks, investors kept selling peripheral European bonds.
Traders went warily back to the yen. The dollar was down 0.4 percent to 78.83 yen , a day after Japan reportedly spent a record 4 trillion yen ($50.6 billion) to weaken its currency and bolster its export competitiveness.
U.S. 10-year Treasury futures ticked up 6/32 to 128-6/32 , just below the Thursday high of 128-12/32, which was the highest since December 2008. The cash yield was at 2.42 percent , a basis point higher than late New York on Thursday when the 10-year yield hit the lowest since October 2010.
The yield has sank 37 basis points so far in August, as a wall of worry sends investors to the most liquid bond market in the world.
Commodity markets extended heavy overnight losses on fears of slowing demand.
U.S. crude for September delivery fell 1 percent to $85.75 a barrel after plunging as much as 6 percent on Thursday and closing at the lowest since February 2011.
In an ominous sign, gold prices were soft despite the spiraling fears hurting risky markets. Investors were having to sell gold positions to cover losses elsewhere in their portfolios.
Spot gold prices eased $3.71 an ounce to $1,644.19 after hitting a record around $1,681 an ounce on Thursday before losing some of the gains.
"This will not be a quiet day. Liquidity will be at a premium," a sales trader with a European bank said.