Treasury yields in the US and euro zone tumbled on another bout of turmoil in banking stocks and shifting interest rate expectations. US inflation data showed signs of economic weakness and cooling inflation.
Gold prices renewed their recent rally as investors sought safe havens. Oil prices plunged more than $5 a barrel.
Concern over further banking sector instability and closely watched inflation data published on Wednesday raised expectations the Federal Reserve may pause or slow down hiking rates.
"The question that is in everyone’s mind is: are we headed for another financial crisis?" said Brad McMillan, Chief Investment Officer for Commonwealth Financial Network in Waltham, Massachusetts. "That's what's driving the bus at the moment."
The Dow Jones Industrial Average fell 331.20 points, or 1.03%, to 31,824.20, the S&P 500 lost 33.68 points, or 0.86%, to 3,885.61 and the Nasdaq Composite lost 15.20 points, or 0.13%, to 11,412.95 by 2:35 p.m. EDT (18.35 GMT).
The MSCI world equity index, which tracks shares in 49 nations, lost 1.27%.
Signs of calm and stability in banking stocks, which have tanked in the past week following the collapse of Silicon Valley Bank (SVB), soon paved way for renewed selling as Credit Suisse shares fell to record lows.
The STOXX 600 index fell 1.67%, while Europe's broad FTSEurofirst 300 index fell 51.58 points, or 2.91%
Investors rushed back into safe haven investments. Germany's two-year yield dropped 51 basis points (bps) to 2.419%, putting it on course for its biggest daily fall since 1995.
The two-year Treasury yield fell to the lowest since September and last touched 3.9788% compared with a US close of 4.225%. It has tumbled 98 basis points in the last five days, the biggest drop since the week of Black Monday on Oct. 19, 1987. On Tuesday, it fell to the lowest since September.
US gold futures GCv1 gained 1.1% to settle at $1,931.30. Spot prices were last up 0.6% at $1,913.52 an ounce.
"The Credit Suisse share price is falling and government bonds are rallying on the back of that. Still very much driven by the perceived health of the banking sector, but this time in Europe," said Antoine Bouvet, senior rates strategist at ING.
The European Central Bank is still leaning towards a half-percentage-point rate hike on Thursday, despite turmoil in the banking sector, given high inflation, a source close to its Governing Council told Reuters.
Markets are "spooked" by Credit Suisse headlines, said Richard McGuire, head of rates strategy at Rabobank in London.
"For today Credit Suisse is the dish of the day but we don't think this will be a longer lasting trend," he said.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.6%, having slid 1.7% on Tuesday. Japan's Nikkei index was flat while an index of Japanese banks, which has slid 8% this week, jumped over 3%
As recently as last week, markets braced for the return of large Fed interest rate rises but the swift collapse of SVB has changed those expectations, with markets pricing in an 80% chance of a 25 basis point hike next week.
Retail sales dropped 0.4% last month, the US Commerce Department said on Wednesday, largely in line with expectations. January data was revised higher to show growth of 3.2% instead of 3.0% as previously reported.
"The real takeaway here for the Fed meeting is that while the inflation problem is not solved, does the Fed say they have more immediate problems," McMillan said. "They will probably go with 25 basis points but I wouldn’t be shocked to see them go flat."
The Euro EUR= was down 1.4% on the day at $1.0578, having gained 0.02% in a month, while the dollar index =USD, which tracks the greenback against a basket of currencies of other major trading partners, was up at 104.69.
In commodities, both crude benchmarks hit their lowest since December 2021 and have fallen for three straight days. US crude fell 4.68% to $67.99 a barrel, while Brent crude dropped to $74.08 per barrel.
