"The global outlook is deteriorating rapidly," said David Watt, senior currency strategist at RBC Capital Markets. "All the growth we've seen is a liquidity-induced hallucination.

"There is a palpable sense of fear," he added.

The volatility in stock markets was unprecedented. The Dow Jones industrial average was down nearly 700 points, or 8.1%, at its lowest then bounced around before embarking on a 1000 point intraday rally to surge more than 300 points higher with a half hour left in trading. But the gains vanished within minutes and the index closed down 128 points to 8451 - the lowest since May 2003.

Market watchers said the intraday rally was based on hopes of some type of rescue package at the G7 meeting in Washington, D.C. There were widely circulated rumours that policy-makers are considering shuttering markets on Monday to give them more time to create a plan.

"The authorities had tried everything and nothing is working," said Levente Mady, a bond strategist at MF Global Canada. "I don't care how much Bernanke studied the depression. There's a huge bubble and it's popping and there's nothing anyone can do."

Including Friday's losses, it was the worst week in the history of the Dow. Even during the crashes of 1929 and 1987, U.S. stocks had better weeks. The Dow closed down 18.1% on the week, the S&P 500 down 18.2% and the Nasdaq down 15.3%.

Elsewhere, the weekly results were equally troublesome. The European Stoxx 600 closed the week down 22% in its worst week on record. The UK's FTSE 100 fell 8.5% on the session in its worst one-day drop since 1987. The Japanese Nikkei closed down 9.6% for a cumulative 23.5% decline on the week.

Canadian shares were sideswiped by a sell-off in commodities. WTI crude oil closed down $5.83 to $80.76 and gold down $34.90 to $851.60 per ounce. The S&P/TSX composite index closed down 535 points, or 5.6%, to 9065. The index is down 16.1% on the week.

"This is a global financial pandemic," said Sherry Cooper, chief economist at BMO Capital Markets. "It is pervasive and prolonged and there has been little advance planning to deal with it."

Toronto's S&P/TSX composite index closed down 535 points to 9065, the S&P 500 closed down 11 points to 899 and the Nasdaq was up four points to 1650.

The Eurostoxx was down 197 points to 2095, the UK FTSE 100 was down 382 points to 3932 and the German DAX was down 343 points to 4544.

The volatility in markets has been staggering. The VIX, which measures volatility in S&P 500 options, hit a record high of 76.94 on Friday. Prior to this month, it had never risen above 50.

What troubled some market participants even more was the inability of Treasuries - with the exception of short-term T-bills - to rally.

Mady said deleveraging, expectations of rising deficits, and fund liquidation were the likely culprits.

"Supply is probably the most obvious answer but nothing anywhere is up, it doesn't matter what it is," Mady said.

Lower prices pushed U.S. two-year yields up 10.2 bps to 1.63%, five-year yields up 8.3 bps to 2.76%, 10-year yields up 8.6 bps to 3.87% and 30-year yields up 3.4 bps to 4.14%. The Eurodollar March 09 contract was up 13.0 ticks to 97.68. The yield curve was steeper, with the 10/2-year spread up 1.4 bps to 225.94 bps.

Yields on two-year Canadian government bonds were up 8.5 bps to 2.22%, with five-year yields up 14.6 bps to 2.93%, 10-year yields up 15.4 bps to 3.79% and 30-year yields up 9.4 bps to 4.25%. The December 08 BAX contract was flat at 97.53.

In Germany, returns on two-year German bonds were down 3.8 bps to 3.04%, with five-year yields up 5.5 bps to 3.56%, 10-year yields up 11.9 bps to 4.00% and 30-year yields up 24.4 bps to 4.46%.

Yields on UK two-year bonds were down 8.9 bps to 3.53%, with five-year yields up 2.0 bps to 4.15%, 10-year yields up 10.0 bps to 4.47% and 30-year yields up 12.4 bps to 4.50%.

Canadian and U.S. debt markets are closed on Monday for holidays, and there is speculation the G7 will announce a plan to stabilize intrabank lending rates.

"There is hope that policymakers will announce a concerted guarantee of the interbank market, which should cause Libor to collapse from its elevated level, easing short-term funding rates and unclogging the short-term funding market," said T.J. Marta, fixed income strategist at RBC Capital Markets. "A coordinated government guarantee of the interbank market could cause Libor to fix sharply lower."

Three-month U.S. dollar libor has been especially problematic. It has spiked 200 basis points to 4.82% in the past three weeks.

The Canadian dollar fell more than four cents at one point Friday afternoon and was in danger of posting its worst session ever. But a late-day rebound pared the majority of losses and it closed down 0.0173 to 0.8531 against the U.S. dollar (1.1723 USD/CAD) and down 0.92 to 85.88 against the yen.

The loonie traded at its lowest level since August 2005 with an intraday low of 0.8275, but ended up closing at its lowest since September 2007.

Strategists say the fear and panic that has gripped global markets has market participants trying to repatriate funds and find liquid assets. The U.S. dollar and Japanese yen have both made massive gains as a result.

"The only thing people want to be liquid in is U.S. dollars. U.S. dollar funding needs are intense right now," Watt said. "You've also got a long weekend. Any time you get ahead of a long weekend, there's worry something could happen and you want to take away risk."

The U.S. dollar was up 0.86 to 100.60 against the yen and the Dollar Index was up 1.257 to 82.420.

The euro was down 0.0201 to 1.3405 against the U.S. dollar, up 0.0069 to 1.5715 against the Canadian dollar, down 0.0096 to 0.7861 against the pound sterling and was lower by 0.92 to 134.88 against the yen.

The pound sterling was down 0.0060 to 1.7038 against the U.S. dollar and up 0.0307 to 1.9971 against the Canadian dollar.

All data taken at 4:55 p.m. EDT.

By Adam Button, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Nancy Girgis, This email address is being protected from spam bots, you need Javascript enabled to view it

CEP Newswires - CEP News © 2008. All Rights Reserved. www.economicnews.ca

The Copying, Broadcast, Republication or Redistribution of CEP News Content is Expressly Prohibited Without the Prior Written Consent of CEP News.

A copy of CEP News disclaimer can be found at http://www.economicnews.ca/cepnews/wire/disclaimer.