US and euro slump sends markets into global spin

World markets were badly hit yesterday as the fallout from poor US economic data, warnings over the future of the Euro and fears of a global recession spooked investors.

Stock markets across Asia were battered as they responded to news that US unemployment was up to 8.2 per cent, the first rise in nearly a year, and that growth in China's services sector was slowing down.

Japan's Nikkei index closed 1.7 per cent down to 8295.63, its lowest level since November. Shares in one of the Nikkei's best known companies, Sony, dropped below 1,000 yen for the first time since 1980 – the year after the launch of the Walkman.

Tokyo's other benchmark index, Topix, slumped to a 28-year low, while European equities and some commodities, such as Brent crude oil, came under pressure. The German blue-chip Dax index traded at under 6,000 points – an important psychological barrier – for the first time since January, though London was immune to the woes as the stock exchange has ceased trading for the Jubilee Bank Holiday.

European markets had braced themselves for a turbulent day of trading following yet another dreadful weekend of news for the single currency.

George Soros, who made $1bn from the collapse of the pound 20 years ago, warned that Germany had three months to save the euro or risk the continent suffering "a lost decade" on a par with Latin America in the 1980s.

Cyprus central governor Panicos Demetriades warned on Saturday the country's €23bn exposure to Greece meant its banking system might require a European Union bailout.

There are also serious worries that Spain might require a bailout from the International Monetary Fund, after Bankia asked Madrid for €19bn – which would be the biggest banking rescue in the nation's history. On Thursday, the Spanish government could see its cost of borrowing rise to the type of levels that saw Ireland, Portugal and Greece require bailouts when it auctions €2bn of bonds.

In the US, there was no immediate recovery from the sharp losses in the equity markets last Friday. The Dow Jones Industrial Average of 30 leading stocks was slightly down in the first few hours of trading, having dipped more than 30 points shortly after the opening bell, on top of its 275-point decline before the weekend. There were signs from the bond market, though, that traders had become modestly less pessimistic. The benchmark 10-year US Treasury, issued by the US government and used as a safe-haven asset by fund managers around the globe, saw less demand, pushing the interest yield back above 1.5 per cent.

The yield had fallen below 1.5 per cent for the first time in history last week, reflecting investors' desperation to find safe places for their money. However, Ward McCarthy, managing director and chief financial economist at Jefferies in New York, warned the rebound in yields was technical, rather than a response to any improvement in the economy or the financial markets.

"The bond market had a great run last week and is technically overbought," he said. "The wobbly wheels of Europe have never been wobblier, disinflation trends have intensified with the collapse of the commodity complex, and US economic activity is on a decelerating trend."

Another piece of gloomy US economic data emerged yesterday, with order for new factory goods down for the third time in four months in April.