European stocks retreated from record highs, while government bond yields, oil prices and the euro tumbled on Friday as the spectre of a fresh COVID-linked lockdown in Germany and other parts of Europe cast a fresh shadow over the global economy.
Markets went into a tailspin after news that Austria will become the first western European state to re-impose a full coronavirus lockdown to tackle a new wave of infections and signs that Germany might do the same.
Germany's health minister Jens Spahn warned the coronavirus situation in Europe's biggest economy was so grave that a lockdown, including for those vaccinated, cannot be ruled out.
“A total lockdown for Germany would be extremely bad news for the economic recovery,” said Ludovic Colin, a senior portfolio manager at Swiss asset manager Vontobel.
"It's exactly what we saw in July, August of this year in parts of the world where the Delta was big, it (COVID-19) came back and it slows down the recovery again."
Such worries helped send oil prices down 3 percent, while investors made a dash for so-called safe assets such as government bonds, the dollar and the yen.
As the dollar rallied 0.4 percent, the euro slid to $1.1283, heading back towards a July 2020 low hit earlier this week. European and U.S. bond yields tumbled 5-6 basis points while equity markets reversed early-session gains.
While the pan-European STOXX 600 index <.STOXX> slipped a third of a percent, Italian and Spanish shares slid more 1 percent and growth-sensitive banking stocks plunged almost 3.5 percent .
European Central Bank President Christine Lagarde doubled down on her cautious position on Friday, saying the ECB should not tighten policy as it could undermine recovery.
“It's not a game changer”, said Emmanuel Cau, head of European equity strategy at Barclays, referring to latest COVID developments.
“Markets have been aware for a few weeks now that this winter will be difficult and that the vaccination rollout doesn't reduce lockdown risk by 100 percent”, he said.
Still, the news in Europe rippled across world markets, taking Wall Street futures broadly lower although trading in NASDAQ futures pointed to a positive start for tech shares.
It was a day for safe-haven assets to step back into favour.
Japan's yen rallied half a percent versus the dollar to 113.70 and the greenback index surged back towards 16-month highs hit recently.
Government bonds, battered in recent weeks by high inflation and expectations for higher interest rates, saw a sharp rally.
That took Germany's 30-year bond yield back below 0 percent for the first time since August which means the country's entire yield curve is in negative territory.
Germany's 10-year yield, the euro area benchmark, fell to the lowest since mid-September at around -0.34 percent, down 5 basis points, having started the day a touch higher.
U.S. and British yields fell 5-6 bps.
Alibaba Hit To Asia
Asian markets earlier in the day had their share of gloom, as e-commerce giant Alibaba reported disappointing earnings, reinforcing worries about slowing Chinese economic growth
MSCI's Asia-Pacific index excluding Japan fell 0.44 percent, after Alibaba's 10 percent share price loss.
Poor performance by Baidu, and Bilibili, whose shares are suspended, reinforced the downward trend.
Elsewhere, Bitcoin slipped to the lowest since mid-October and is set for its worst week in six months -- 20 percent below recent record highs.
And Turkey's lira gave up earlier gains and traded flat, a day after crashing 6 percent when the central bank, under pressure from President Tayyip Erdogan, slashed rates again.