Investors in crisis mode again
London - Almost three years on, memories of the market turmoil that followed the collapse of Lehman Brothers are coming back to haunt investors.
World stocks, which hit an 11-month low on Friday, are on track for their biggest weekly loss since Nov 2008 - part of the chaotic period after the Lehman bankruptcy. Money markets are showing signs of the same kind of stress that was seen then.
The big question mark is how do policymakers respond, with speculation growing about the prospect of a third round of bond-buying -- quantitative easing or QE3 - by the US Federal Reserve, which meets on Tuesday.
The European Central Bank, for its part, has moved in to buy bonds but stopped short of the heavy purchases of Spanish and Italian debt many analysts say is needed to stem the rout.
US jobs numbers on Friday, however, provided markets with some brief relief and policymakers also have to be wary about the knock-on effects of QE - the Fed's last batch of such easing is widely held to be responsible for higher global inflation.
"If data continues to be weak, in another 2-3 months it's likely (that the Fed would conduct QE3)," said Phil People, head of global and macro strategy at HSBC Global Asset Management.
"It may be a soft patch but it may not be a soft patch. It's still not clear. But there is a lot of liquidity in the system and people will have to start investing again."
There is no shortage of indicators flashing amber - from equity volatility to widening interbank spreads - warning that the current sell-off might turn into something more vile.
Expectations that central banks around the world would embark on further action grew after Japan intervened to halt yen's strength on Thursday and pledged to buy assets such as stocks and bonds to bolster growth.
As well as buying bonds for the first time since March, the ECB announced new longer-term funding for liquidity-starved banks, while Switzerland and even Turkey unexpectedly cut interest rates over the past week.
An overwhelming rush into cash has resulted and is straining some banks as cash that is not invested in short-term funds - required by a trust or custody accounts - affects its capital ratios by increasing liabilities.
Bank of New York is now charging a fee to big corporate and asset management clients that deposit more money than average, because it has been overwhelmed by deposits .
Money market stress
Data from Lipper showed investors pulled nearly $66bn from money market funds in the week ended August 3, the second-largest weekly net outflow on record. The record outflow was seen during the week ended September 17, 2008.
European money markets were at the heart of the deterioration as a plunge in financial shares, especially in Italy, caused investors to cut their exposures to troubled euro zone members across the board.
The vicious circle of widening bond yield spreads slamming equities and financial shares has pushed the EURIBOR-OIS spread -- which gauges funding costs - as wide as 57.7 bps, levels not seen since May 2009.
The equity sell-off has wiped $2.5 trillion off company values in the past week. The Volatility Index, Wall Street's barometer of investor anxiety , jumped to 32.7, its highest levels since July 2010 and above the level set after Japan's earthquake and tsunami in March.
Pressure will build among Federal Reserve policymakers at Tuesday's policy-setting meeting for measures to pep up a stumbling recovery with a stronger commitment to rock-bottom interest rates.
"QE is an option for the United States and the same would go for the UK. But action has to be more directed. If action that is likely to work is taken, markets will recover. If you look long term, companies are in a much better shape with strong balance sheets and realistic business plans," said David Miller, partner at Cheviot Asset Management.
"Markets are reacting very violently but it's a continuation of the workout we've been doing rather than something new that suddenly hit us."