Traders fled stocks amid reports President Donald Trump instructed fired FBI director James Comey to back off his investigation of former national security adviser Michael Flynn, raising concerns about impeachment and Trump's ability to enact his pro-business agenda.
One reason that the markets may not be in full blown panic mode about the latest crisis du jour in Washington is because they may be already anticipating the possibility that Trump will not serve a full term in the White House.
Prices of bonds, seen as safe-haven assets, rallied, while yields were on track for their biggest daily percentage drops since July. The S&P 500 dropped more than 25 points, or roughly 1 percent, while the Nasdaq fell nearly 100 points - 1.6 percent - in the same time.
Financial companies led stocks sharply lower in early trading as investors fretted over the potential fallout roiling the Trump administration.
Seven of the index's top 10 sectors fell more than 1 per cent.
STRONG QUARTER: Target gained 1.8 percent after the retailer posted surprisingly strong earnings for the first quarter.
Futures on the Dow Jones Industrial Average (DJIA) are almost 46 points below fair value. The Nasdaq Composite Index slumped 2.6% from its all-time high to 6011.24 and the Standard & Poor's 500 Index shed 1.8% to 2357.03.
The benchmark S&P/ASX200 index fell 0.8 per cent, which coupled with Wednesday's fall of 1.1 per cent has wiped about $30 billion from the market's value.
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The Bloomberg Dollar Spot Index dropped 0.2 percent as of 8:28 a.m.in NY, trading at the lowest level since November 8. The stock added 74 cents to $55.28. Falling bond yields mean lower interest rates on loans and tighter profits for banks.
The only gainers were utilities, real estate and consumer staples sectors - so-called defensive stocks which often do well in times of uncertainty due to their predictable if slow growth and high dividend yields.
Markets in Europe carved out sizable losses, with the CAC 40 in Paris ending down 1.6% and Frankfurt's DAX taking a 1.4% loss.
The Australian dollar is higher though, with better-than-expected jobs numbers for April taking it to a two week high of around 74.5 USA cents. The dollar strengthened to 111.17 yen from 110.82 yen.
The pound rose above 1.30 against the U.S. dollar for the first time since September, as strong United Kingdom retail sales gave a boost to sterling and jitters surrounding calls for Donald Trump's impeachment weighed on the greenback. Crude futures added 0.3 percent in NY, reversing an earlier 1.3 percent loss, before the release of USA government data on oil inventories and Iraq, together with non-OPEC nation South Sudan, backed the extension of supply cuts to balance the market.
After a protracted period of dormancy, financial markets are beginning to react to developments in Washington in a more unified manner. Gold for June delivery added $22.30, or 1.8%, to end at $1,258.70 per ounce.
Japan's Nikkei 225 dropped 0.5%, while South Korea's Kospi dipped 0.1%.
Hong Kong's Hang Seng Index was down 0.56%.