By Chris Prentice, Dhara Ranasinghe and Naomi Rovnick
NEW YORK/LONDON (Reuters) -A rout in global equities extended on Friday and government bond markets came under fresh selling pressure as hawkish tone from central bankers and weak data stoked recession fears.
The selling spilled over into commodities markets, where oil prices dropped over $2 per barrel. Gold prices faced their biggest weekly loss in four weeks after the Federal Reserve indicated it was not done hiking rates.
The dollar rose in choppy trading.
The Fed was one of a slew of central banks that jacked up interest rates and signalled that the fight to tame inflation this week.
Euro zone bond yields jumped a day after the European Central Bank pledged further monetary tightening to fight inflation. U.S. yields also rose, catching up with the global bond sell-off. [US/]
U.S. shares extended their slide, after data showed U.S. business activity contracted further in December, but softening demand helped to significantly cool inflation.
The data "confirmed Wall Street's fears that the economy is quickly headed towards a recession," said Edward Moya, senior analyst with OANDA.
The Dow Jones Industrial Average fell 0.85% to 32,920.46, the S&P 500 lost 1.11% to 3,852.36 and the Nasdaq Composite 0.97% to 10,705.41.
European shares posted their largest weekly loss since September, with the STOXX 600 index ending down 1.2%, skidding to a weekly loss of nearly 3.3%.
MSCI's world stock index lost 1.1% and touched its lowest level in over a month.
S&P Global (NYSE:SPGI)'s flash purchasing managers index showed eurozone economic activity contracted for the sixth consecutive month in December, although the deceleration also eased to its slowest pace in four months.
In Asia, Japan's Nikkei index closed at its lowest in more than a month and MSCI's broadest index of Asia-Pacific shares outside Japan was set for its worst week in two months.
The dollar index edged 0.23% higher, while the euro (EUR=) was down 0.3%.
This week's hawkish message from central bankers brought an abrupt end to optimism that peak interest rates are on the horizon.
"Central banks delivered a blow to markets that were rebounding in anticipation of policymakers turning dovish on inflation and interest rates," said Sunil Krishnan, head of multi-asset at Aviva (LON:AV) Investors.
The ECB delivered a 50-bps hike like the Fed. Both opted for a smaller increase this time, but flagged there were more increases to come.
Its hawkish message prompted a second day of heavy selling across European bond markets where yields on benchmark German 10-year bonds jumped.
The yield on Germany's rate-sensitive two-year bond rose as high as 2.503% on Friday,, its highest since 2008.
"We now expect the ECB to go to 3.25% (including 50 bps in March) and the Fed to 5.25% which argues for persistent pressure on yields and spreads," said Christoph Rieger, head of rates and credit research at Commerzbank (ETR:CBKG).
GROWTH WORRIES
In China, where markets are churning around an uncertain reopening, relief at the apparent resolution of a long-running accounting access dispute with the United States was not enough to bolster sentiment.
Meanwhile, Japan's manufacturing activity shrank at the fastest pace in more than two years in December, while U.S. retail sales fell more than expected in November.
In commodities, the spot gold prices rose 0.88% by 4:17 p.m. EST (2117 GMT), but were poised for their biggest weekly loss in four weeks.
Gold futures settled up 0.7% at $1,800.20 per ounce. Interest rate hikes increase the opportunity cost of holding non-yielding bullion.
Oil prices dropped, with Brent crude futures settling at $79.04 per barrel, down 2.4% and U.S. crude finished down 2.4% at $74.29 per barrel.