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Tokyo - Asian shares tumbled on Friday and were set for their worst weekly showing since September, amid political turmoil in Greece and signs of growing instability in Spanish banks, with investors adding the latest weak US data to the list of risk factors.
Assets across the board, from commodities such as oil and gold to riskier currencies such as the euro and the Australian dollar were all heading for their weekly losses.
Financial stocks were hammered after the head of Australia and New Zealand Banking Group said volatile conditions in global markets have caused the wholesale funding market for Australian banks to freeze again, a worrying echo of the global financial crisis.
European shares were also set to fall, with financial spreadbetters predicting that major European markets would open down as much as 1.3%. US stock futures were down 0.3%.
"It is too difficult to accurately quantify the risks in Europe over which concerns will become reality and how much damage it will translate into," said Cho Byung-hyun, an analyst at Tong Yang Securities.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 3% to its lowest this year, after snapping a four-day losing streak on Thursday, and was on track for its worst weekly performance in nearly eight months with a weekly loss exceeding 6%.
The index has shed more than 11% in May, wiping out all its gains for the year.
Concerns over weak demand dragged the materials sector down 3.6%, while fears of slowing global economies sent growth-sensitive technology and industrials sectors down 3.6% and 3.1% respectively.
Korean shares plunged the most in the Asian index with a 3.3% drop to their lowest this year, dragged down by blue-chip heavyweights such as Samsung Electronics , which lost more than 4%.
Australian stocks also remained strongly pressured by a sluggish outlook for both the commodities markets and the Chinese economy - two key factors affecting investor sentiment.
Japan's Nikkei stock average slumped 3% to a four-month low and was on track for its seventh straight weekly loss, its longest such losing run since 2001.
"There is no resolution to the (European) problem yet, and we also we had very disappointing US data, so overall, it's negative and further denting market sentiment," said Frances Cheung, senior strategist for Asia ex-Japan at Credit Agricole CIB in Hong Kong, referring to an unexpected contraction in US regional manufacturing and a lacklustre jobs market data.
Stressful times
As risk aversion intensified, the CBOE VIX Volatility index , a gauge of investor anxiety that measures expected volatility in the Standard & Poor's 500 index over the next 30 days, rose nearly 1% to close at a five-month high of 24.49 on Thursday.
High stress levels spilled over to Asian credit markets on Friday, sharply widening the spread on the iTraxx Asia ex-Japan investment-grade index by 11 basis points to its widest level since mid-January.
"It's usually a liquidity crisis that causes an explosion in volatility, which in turn drives a second round impact through economic losses. That has not happened yet. That's good. But that's where the list of positives ends," Bhanu Baweja, strategist at UBS, said in a note to clients.
Concerns about growth plus Europe's worsening financial woes have given momentum to the flight to safety, pushing the 10-year Japanese government bond yield to its lowest since July 2003 at 0.815% on Friday.
Investor appetite for the dollar and the yen, perceived as safer assets, was also strong.
The euro fell to a three-month low below ¥100.40 while the dollar index measured against key currencies climbed to a fresh four-month high, leaving the dollar/yen just above a three-month low of ¥79.13 hit on Thursday.
But the euro marked a fresh four-month low around $1.2655 on Friday and was expected to stay under strong selling pressure. The Australian dollar fell to its lowest since late November near $0.9800.
"Financial and asset market divergence in the eurozone is likely to make the EUR (euro) less attractive to reserve managers, in our view," leaving the single currency increasingly vulnerable, Morgan Stanley said in a research note.
European woes hurt oil
US June crude oil fell 0.5% to $92.12 a barrel and Brent eased 0.3% to $107.20.
Spot gold steadied at $1 573 an ounce, but was set to drop for a third straight week on mounting concerns over the eurozone debt crisis.
Financial instability in Spain deepened, with Moody's Investors Service cutting the long-term and deposit ratings of 16 Spanish banks, just as the prospect of more state bailouts for banks have pushed the country's borrowing costs higher.
Also on Thursday, Fitch downgraded Greece deeper into junk territory, citing the risk that the heavily indebted country might leave the eurozone.
A poll on Thursday, the first conducted since talks to form a government collapsed and a new election was called for June 17, showed Greek voters were selecting pro-bailout parties, which would soothe European leaders who say that without the bailout Greece would be headed for bankruptcy and falling out of the common currency.
