The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, December 21, 2018. REUTERS/Staff Image Credit: Reuters

LONDON: World stocks extended a steep sell-off on Friday as the threat of a US government shutdown and further hikes in US borrowing costs compounded investor anxieties over the trajectory of global economic growth.

European shares traded in negative territory, following in the footsteps of US and Asian markets. The pan-European STOXX 600 fell over half a per cent, continuing its slide towards lows not seen since the end of 2016.

It had last pared some losses to trade 0.2 per cent lower.

Most European bourses and industry indexes were in the red after the S&P 500 fell overnight, heading for its worst quarter since the dark days of the financial crisis in late 2008, with a loss of 15 per cent so far. The Nasdaq has shed 19.5 per cent from its August peak, just shy of confirming a bear market.

The pain across equity markets eased a little on Friday, with US equities rising.

The S&P 500, led by consumer discretionary stocks, rose early in the session. The Nasdaq Composite, which had been on the brink of entering a bear market, also advanced. Nike Inc. led the charge in the Dow Jones Industrial Average after its quarterly results stomped projections.

That’s not to say they’re aren’t plenty of potential pitfalls looming. The shutdown standoff in Washington has yet to be resolved, and the resignation of Jim Mattis as defence secretary has stoked the turmoil in President Donald Trump’s White House.

The dollar, which had suffered its biggest one-day drop on the yen since November 2017 on Thursday, lost a further 0.1 per cent against the yen.

“China is cooling and the Eurozone is slowing down, and some of the economic indicators from the US have been a bit soft recently, but yet the Fed hiked rates and suggested that two more interest rate hikes were lined up for 2019,” said Michael Hewson, chief markets analyst at CMC Markets in London.

He said speculation the US economy could be headed for a recession has picked up, dampening global sentiment. “Fear about a US government shutdown is playing into the mix too.” Eyes will be on US inflation numbers due at 1330 GMT on Friday, which include the Federal Reserve’s preferred measure of core inflation.

MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.2 per cent.

The MSCI All-Country World index, which tracks shares in 47 countries, was down 0.2 per cent on the day.

It was set for its worst week since March.

Japan’s Nikkei lost 1.1 per cent to close at its lowest since mid-September last year, after giving up 5.6 per cent this week. Australian stocks slipped 0.7 per cent, hovering just above a two-year trough hit earlier in the session.

Chinese blue chips lost 1.4 per cent, in part after the United States accused Beijing of orchestrating the hacking of government agencies and companies around the world.

Sentiment had turned sour on Thursday when the US Federal Reserve largely retained plans to increase interest rates despite mounting risks to growth.

Markets were further spooked when US President Donald Trump refused to sign legislation to fund the US government unless he received money for a border wall, thus risking a partial federal shutdown on Saturday.

“Political brinkmanship in Washington is further heightening market uncertainty,” said Westpac economist Elliot Clarke.

“Friday will be a tense day in Washington, and for financial markets, as a last-minute compromise is sought.” Adding to the air of crisis was news US Defence Secretary Jim Mattis had resigned after Trump announced a withdrawal of all US forces from Syria and sources said a military pullback from Afghanistan was on the cards.

The brittle mood showed on Wall Street where the Dow ended Thursday with a loss of 1.99 per cent. The S&P 500 dived 1.58 per cent and the Nasdaq 1.63 per cent.

Stampede for the exits

The mood change has triggered a rush out of crowded trades, including massive long positions in US equities and the dollar and short positions in Treasuries.

Lipper data on Thursday showed investors pulled nearly $34.6 billion out of stock funds in the latest week and were heading for the biggest month of net withdrawals on record.

There was also a sense of capitulation in currency markets as the dollar dived 1.1 per cent on the yen on Thursday to hit a three-month trough at 110.80. It was last changing hands at 111.16 having shattered several layers of chart support.

The euro dipped 0.2 per cent to $1.1420, having jumped to its highest in over six weeks at $1.1485. Against a basket of currencies the dollar regained lost ground, up 0.3 per cent at 96.563 after suffering its largest single-session fall in two months.

Yields on the 10-year US Treasury were back up to 2.792 per cent after hitting their lowest since early April at 2.748 per cent on Thursday’s bid to safety. As recently as October, they had been at a seven-year top of 3.261 per cent.

The gap between two- and 10-year yields was back up to just 12.8 basis points, after flattening to 9 basis points overnight.