Amid the uncertainty, traders pulled out of any risky investments — such as stocks, particularly financial ones, the euro and emerging market currencies — to pile into safe havens: U.S. Treasurys, the dollar, the Japanese yen and gold.
European shares slumped in early trading. Britain’s FTSE 100 dropped 2.9 percent to 5,136.36. Germany’s DAX fell 4.7 percent to 5,280.13, and France’s CAC-40 tumbled 4.6 percent to 3,003.64.
Markets in the U.S. were closed for the Labor Day holiday.
Banking stocks were among the hardest hit after the U.S. government sued 17 financial firms Friday for selling Fannie Mae and Freddie Mac billions of dollars worth of mortgage-backed securities that turned toxic when the housing market collapsed.
Among those targeted by the lawsuits were Bank of America, Citigroup, JP Morgan Chase and Goldman Sachs. Large European banks including The Royal Bank of Scotland, Barclays Bank and Credit Suisse were also sued.
Renewed jitters over the eurozone debt crisis also contributed to the slump in financial stocks amid concerns they would need to raise new capital. Deutsche Bank was down 9.4 percent in Frankfurt while Societe Generale in Paris shed 9 percent.
An international debt inspectors’ review of Greece’s finances was interrupted Friday amid disagreements over the country’s deficit figures. The review will be resumed in about 10 days and must be completed in order for the country
to receive its bailout loans at the end of the month.
Signs that the Italian government’s commitment to its austerity program is wavering have also shaken investors. Prime Minister Silvio Berlusconi’s government has backtracked on some deficit-cutting measures, prompting EU economic officials to urge it to stick to its promised plan.
The economic indicators, meanwhile, were mostly downbeat. Although retail sales in the eurozone rose unexpectedly in July, a survey of the services sector showed a slowdown across the continent for the fifth consecutive month.
The Purchasing Managers’ Index for the eurozone showed the services sector was still growing — unlike the manufacturing sector — but only barely. That will add pressure on the European Central Bank to keep interest rates on hold when it meets this week.
“Indeed, the latest data and surveys suggest that the ECB’s eventual next move could actually be to trim interest rates, although it is likely to need sustained eurozone economic weakness and possibly even GDP contraction to get the ECB to perform a U-turn on interest rates,” said Howard Archer, economist at IHS Global Insight.
In Asia, indexes closed sharply lower. Japan’s Nikkei 225 stock average sank 1.9 percent to close at 8,784.46, with sentiment also undermined by the persistent strength of the yen, which hurts exporters.
In currencies, the euro weakened to $1.4078 from $1.4187 in New York late Friday. The dollar was roughly flat at 76.92 yen. Last month, the dollar fell under 76 yen, which was a new post-World War II high for the Japanese currency.
Benchmark oil for October delivery was down $1.85 to $84.60 a barrel in electronic trading on the New York Mercantile Exchange. Crude oil fell $2.48 to settle at $86.45 Friday.
