Gripped by fears that Europe's debt crisis is driving the world economy into a ditch, companies are delaying plans to raise capital and cancelling deals, while investors are taking refuge in cash or any other place they think their money will be safe.
The retreat has been so acute that yields on German two-year bonds have gone negative, meaning investors have become so wary of losses elsewhere that they are willing to pay for the privilege of lending money to the German government. Stocks and commodities have been hammered.
And with the economic picture dimming in the United States and major developing economies, including Brazil, India and China, brave is the major corporation willing to take on new workers. The pace of hiring in the United States in May was the slowest in a year.
"What we're seeing is a sharp deterioration in economies worldwide. It's a very unstable situation. Markets are being driven by fear, and they're tougher to call than ever," said Gregory Whiteley, who helps manage $35 billion at DoubleLine Capital in Los Angeles.
The scariest part is this: the tighter people batten down the hatches, the worse things can get. Slower growth will worsen government budget deficits as tax revenue dries up in the United States and Japan, while making it all but impossible for indebted European countries such as Spain, Ireland or Italy to grow their way back to health.
If activity slows enough, large swathes of the world could tumble back into recession less than four years after the collapse of Lehman Brothers triggered the global financial crisis and brought many nations to edge of a precipice.
The grim outlook has already toppled a series of European political leaders in the past two years and is compromising U.S. President Barack Obama's chances of winning reelection in November. With the jobless rate soaring in some European countries, the risk of widespread social unrest has increased.
And this time around, with interest rates in the developed world pinned down near zero, and stressed budgets leaving less room or appetite for stimulus spending, there isn't so much that governments and central banks can do to help.
HIGH STAKES IN EUROPE
Europe tops the list of concerns for now. If Greece leaves the euro zone after an election set for June 17, many fear it could spark bank runs in Spain, freeze credit worldwide and maybe even spell the end for the euro.
Finance officials from the Group of Seven most developed powers will hold emergency talks on the euro zone debt crisis on Tuesday, which some analysts see as an attempt to pressure Germany into supporting European banks and stimulating the region's economy.
"The top concern is really one word -- contagion," said King Lip, chief investment officer at Baker Avenue Asset Management in San Francisco, adding he had cut clients' Europe exposure to 10 per cent to 15 per cent, about half of typical holdings.
"If something happens in Greece, it could cause a credit freeze across Europe, and people are concerned that what's going on in Europe is going to cross the pond."
In most cases, EU officials are working on proposals that could take months and years to put in place, including Germany's push for a closer European fiscal union. But those with money -- whether a depositor with a modest account at a Spanish bank or a giant fund with billions of dollars at stake -- are demanding action in days.
That is what worries many in the market.
If Greece quits, "the Europeans will have to do extraordinary things to avoid contagion of the sort that could knock out Ireland, Spain and Portugal pretty quickly," said Gabriel de Kock, director of FX research at Morgan Stanley. "If you make the wrong decisions, you don't get a do-over. And the Europeans have made a lot of mistakes over the past two years."
COMPANIES SAYING "NO DEAL"
Those fears have blistered stock markets, erasing the Dow industrials' gains for the year, while European stocks hit five-month lows, having shed some 15 per cent from their March peak, and Hong Kong stocks on Monday fell to their lowest level of 2012.
Another troubling sign: commodity prices have plunged, signaling real concerns about the strength of demand from manufacturers and construction companies in China and elsewhere. Brent July crude oil touched a 16-month low of $95.63 a barrel on Monday after dropping more than $30 from its post-2008 peak of $128.40 at the beginning of March.
Meanwhile, copper, which is used in many industrial and building products, has touched low for this year.
Instead, investors have poured money into debt issued by the most credit-worthy governments, including the United States, Germany and Britain. That drove the yield on benchmark 10-year U.S. Treasuries to record lows beneath 1.50 per cent at the end of last week.
That is a problem for some small nations, such as Switzerland and Denmark, as the flood of money has lifted the value of their currencies to a point where they fear their exports will become uncompetitive.
Elsewhere, companies far beyond Europe's borders are delaying deals. On Monday, Australia's Brambles Ltd <BXB.AX>, the world's biggest pallet supplier, scrapped the sale of its information management business because of low offers. At least five large Asian initial public offers of shares were postponed or pulled last week, including the $3 billion Singapore listing of motor sport racing company Formula One.
"Financing markets have certainly choked up over the last few weeks," said a senior private equity executive in New York. "The Europe thing is scaring people. I don't see that folks see what the end game is here, and until that settles down a little bit, it's going to be very, very tough out there."
Added another senior Wall Street deal maker: "It takes so little anymore to give people pause that when you combine JPMorgan, Spain and Greece, the Facebook IPO, and the U.S. economy (going) down, the Chinese economy (going) down ... it's a lot of red."
Small hedge funds are increasingly throwing in the towel in Asia as they struggle to attract money from risk-wary investors. The latest to quit is former Lehman Brothers trader Allan Bedwick, who is shutting his $120 million Asia-based fund after giving it a two-and-half-year run, fund documents obtained by Reuters showed.
Raising money has also grown tougher for global companies, with equity, bond and loan markets becoming prohibitively expensive for all but the highest-quality corporate borrowers.
According to IFR data, volume in the U.S. investment grade bond market has dwindled from $284.8 billion in the first quarter to just $118.7 billion in April and May.
If things get worse, emerging markets in particular will be most affected, as they were following Lehman's 2008 demise.
Georgia's state railways monopoly and Russian real estate investor O1 Properties pulled planned London listings, blaming market uncertainty over Greece that had deterred investors from sinking money into IPOs and emerging markets.
Globally, money raised from stock market flotations so far this year is down 46 per cent from the same period in 2011, according to Thomson Reuters data.
"FRAGILE SENSE OF CONFIDENCE"
Against such a backdrop, it's little surprise that U.S. companies have grown skittish about adding new workers. The U.S. economy created just 69,000 new jobs in May, its worst showing in a year, while the jobless rate rose.
The biggest U.S. phone company by revenue, AT&T, is not seeing many jobs being created by either its big or its small corporate clients. "We are not seeing any hiring in the upper end of business in the U.S.," said CEO Randall Stephenson at an investor conference in New York on Friday. "People aren't hiring a lot in the U.S," he said.
Even with its rate of growth slowing to 1.9 per cent in the first quarter, the U.S. economy is more robust than many in Europe that are on the verge of or already in recession.
Some say that means there's still hope.
"Every time I speak to other CEOs, who don't necessarily make cars, there's no indication of the fact that the economy here in the United States is at all coming to a grinding halt," said Sergio Marchionne, head of No. 3 U.S. automaker Chrysler Group LLC.
But the outlook for hiring still looks gloomy. Anxiety about the upcoming U.S. elections is another reason, particularly since tax increases and spending cuts planned for next year could send the U.S. economy into recession unless politicians pull back from what markets have termed the "fiscal cliff."
"It's nervousness about the election and regulation and taxes," said Scot Melland, CEO of Dice Holdings Inc <DHX.N>, which runs websites that recruit technology and finance workers. "It's uncertainty about what the business environment is going to be like.
CENTRAL BANKS TO THE RESCUE?
In the past few years, central banks have come to the rescue when markets were turning downward - first by slashing interest rates to record lows and then by flooding the financial system with money.
But it's not clear they can stage a repeat performance. The European Central Bank briefly stabilized markets earlier this year by offering more than 1 trillion euros in cheap loans to European banks, but is not likely to take new steps this week.
Investors are starting to expect the U.S. Federal Reserve, which has already pumped more than $2 trillion into the financial system through purchases of government and mortgage bonds, to do more when it meets later in June.
But not everyone thinks throwing more money at the problem will do much good.
"The Fed is always saying it has a range of tools at its disposal, but the fact is, they don't have too many," said DoubleLine Capital's Whiteley. "It can buy bonds, but that's about it. And it's not clear to me that's going to have much impact on the economy."
That has left some investors hoping China can save the day with a repeat of 2009's 4 trillion yuan stimulus package.
They may be in for a surprise.
With the Chinese economy slowing, some economists fear Beijing can ill afford to run up more debt.
"Not only is the policy room smaller, but the incentives for the government to produce a large stimulus package are smaller," said Qinwei Wang, a China economist at Capital Economics in London.
Perhaps the best indication of how worried people are rests with veteran investors like Donald Gimbel, a senior managing director at New York-based Carret Asset Management.
Concern about Europe has prompted him to spend the first five months of the year increasing the cash position of the firm's $1.6 billion under management, taking it from 2 per cent to about 15 per cent by May - the highest since 2008.
In the past, Gimbel, 70, said that he would have started using all that cash to scoop up potential bargains in equity markets. But this time, he said he was prepared to wait for solid evidence of progress in Europe before coming off the sidelines.
"I'm more patient now than I was 20 years ago," he said. "If you try to catch a falling knife, the only thing that happens is you get blood on your hands."
Copyright @ Thomson Reuters 2012
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