* Global stock markets see biggest weekly drop since 2012
* Crude oil on longest weekly losing streak in 29 years
* U.S. dollar extends losses as Fed rate rise doubts grow
* China factory activity at almost 6-1/2-year low
(Adds close of U.S. markets)
By Herbert Lash
NEW YORK, Aug 21 (Reuters) - World stock markets tumbled on
Friday and U.S. oil prices dove briefly below $40 a barrel
sparked by fresh evidence of slowing growth in China, sending
investors scurrying to the safety of bonds and gold.
Stocks on Wall Street and in Europe fell more than 3 percent
in a global rout spurred by a more than 4 percent fall in
Shanghai stocks .SSEC .
Thomas Lee, managing partner at Fundstrat Global Advisors in
New York, said it was hard to say what was behind the sell-off
in stocks but a market bottom may be close at hand.
"There's no shortage of things people can cite, from the
movement in currencies, to the weakness in commodities and fears
about China," Lee said. "But at the end of the day if people are
trying to take down risk, then it's going to make sense for them
to sell their exposure in equities as well."
Crude posted its longest weekly losing streak in nearly 30
years and emerging market stocks, bonds and currencies all fell,
with slowing Chinese growth withering demand for commodities
from developing countries.
China's manufacturing sector shrank at its fastest rate in
more than six years in August, according to a survey from
private data vendor Caixin/Markit.
World markets had already been on edge after China's
surprise devaluation of the yuan last week and a more
than 30 percent fall in its stock markets since mid-year.
The U.S. dollar fell too, dropping to a two-month low
against the euro, as the Chinese data and falling commodity
prices eroded expectations the Federal Reserve will raise U.S.
interest rates next month.
"The Fed is in an extremely awkward situation right now,"
Robbert van Batenburg, director of flow strategy at Societe
Generale. "You have across-the-board competitive currency
devaluations that will invoke the deflationary monster here in
the U.S."
The Dow industrials, Nasdaq 100 .NDA and major European
stock indices have now fallen more than 10 percent from their
peak earlier this year.
The pan-regional FTSEurofirst .FTEU3 fell 3.4 percent to
1,427.13, its worst day since November 2011, as traders shrugged
off upbeat euro zone manufacturing and services data in a third
straight day of selling.
MSCI's emerging markets index .MSCIEF was at its weakest
in four years, off 2.16 percent, while the firm's all-country
world stock index .MIWD00000PUS fell 2.7 percent.
The Dow Jones industrial average .DJI fell 530.94 points,
or 3.12 percent, to 16,459.75. The S&P 500 .SPX slid 64.84
points, or 3.19 percent, to 1,970.89 and the Nasdaq Composite
.IXIC lost 171.45 points, or 3.52 percent, to 4,706.04.
A U.S. recession is not in sight, and with stock valuations
such as price to earnings, to book and to sales at or close to
25-year averages, the sell-off may be overdone, said David
Kelly, chief market strategist at JPMorgan (NYSE:JPM) Asset Management.
"If you're fully invested, just enjoy the rest of the
summer," Kelly said. "If you're sitting on cash waiting for a
buying opportunity, well guess what, this is the buying
opportunity."
OIL AND EMERGING MARKETS HIT
Crude oil fell again as oversupply from members of the
Organization of the Petroleum Exporting Countries in particular
continues to overwhelm slowing demand.
U.S. crude CLc1 was at a more than six-year low as it
posted an eighth straight weekly decline. The U.S. benchmark
traded briefly below $40 a barrel before settling down 87 cents
at $40.45. Brent LCOc1 fell $1.16 to settle at $45.46.
ID:nL3N10W124
Oil's run of weekly losses is its worst since 1986.
Emerging market currencies in the Americas tracked Asian
markets lower, with the Colombian COP= and Mexican pesos
MXN= as well as Brazil's real falling more than
1.0 percent against the dollar.
Earlier in Asia, the Malaysian ringgit hit a pre-peg
17-year low and South Korea's won took its losses to
1.8 percent against the dollar this week.
Gold, seen as a good asset in difficult times, rose
to its highest in more than a month. U.S. gold futures
for December delivery settled up 0.6 percent at $1,159.60 an
ounce.
Yields on safe-haven U.S. Treasuries slipped further, with
the benchmark 10-year note US10YT=RR rising 10/32 in price,
pushing its yield down to 2.0487 percent.
Lower Treasury yields and the stronger euro weighed on the
dollar. The greenback traded down 1.01 percent at 122.14 yen
JPY= and against the euro EUR= , the dollar fell 1.17 percent
to $1.1373.