Panic grips sharemarkets

The Dow Jones Industrial Average Index lost 2.2 per cent after US employment rose only 69,000 in May, which was less than half of what most economists had forecast.

The US panic was joined by huge falls on other bourses Germany's sharemarket lost 3.42 per cent and Canadian stocks fell 2.21 per cent. UK shares shed 1.14 per cent, and the Nikkei dropped 1.2 per cent as British manufacturing slumped to a three-year low and European unemployment rose to a record 11 per cent.

Analysts warned investors yesterday to prepare for another "stomach churner" this week as the Reserve Bank decides on interest rates tomorrow. Some economists tip the central bank to slash the official cash rate by 50 basis points returning to near the emergency setting of the global financial crisis.

The futures index is pointing to a 58-point, or 1.4 per cent, fall in the Australian equity market, which would taking it to a nine-month low of 4012 points.

The market fractures come as Europe's financial problems hit a critical point, with Spain the eurozone's fourth largest economy now at risk of needing to be bailed out given its banking system problems.

Speaking at a weekend conference in Italy, US billionaire George Soros said the euro crisis which he defined as a sovereign debt crisis and a banking crisis closely interlinked was threatening to destroy the European Union and plunge it into a lost decade such as experienced in Latin America in the 1980s.

Mr Soros said Germany had three months to lead the way out of the crisis or it would be too late.

The realisation of lower global growth, together with increasing financial instability across Europe, has spurred on the collapse in yields on high-quality government bonds.

Benchmark 10-year bond yields fell to 1.45 per cent in the US, while yields on Australian government long-term bonds continued to push record lows of 2.83 per cent.

Elsewhere, gold on Friday jumped more than 3 per cent to $US1609 an ounce as investors looked for low-risk assets, while the Australian dollar was trading at near eight-month lows of US96.87?.

Fund managers said the panic increased the chances of another round of quantitative easing in the US, which could encourage investors to return to equities.

"It doesn't bode well for the beginning of this week," said Will Seddon from White Funds Management.

"But there's now a much stronger argument in favour of further quantitative easing by the US Federal Reserve, and we know that China's starting to talk more about what policy actions they might take to stimulate their growth," he said. "So this fear might soon flip around and be more focused on the opportunity for easier money, or the stimulus that the fear might encourage."

Spurring on the shock to global confidence were the softer-than-expected US employment figures. Only 69,000 jobs were created in May, less than half the consensus forecast. That suggested the US economy was again slowing. European unemployment hit a record 11 per cent while UK manufacturing hit three-year lows.

This caused the Dow Jones Industrial Average Index to fall 2.22 per cent, erasing its gains for 2012.

Stephen Walters, chief economist at JPMorgan, said there was a strong chance the Reserve Bank could cut the cash rate by 50 basis points tomorrow. This would take the official cash rate to 3.25 per cent, just one notch above the 3 per cent of mid-2009.