The Australian share market had its second straight day of heavy selling on Friday, after an overnight plunge for Wall Street, while the Australian dollar continued to retreat.

By 11:20am (AEST), the ASX 200 had lost 3.1 per cent to 5778 points, while the All Ordinaries index was down by 3.2 per cent, or 195 points, to 5884.

The Australian dollar continued to fall against the greenback after a savage sell-off overnight, buying around 68.1 US cents.

The losses follow a period of optimism on markets, with the ASX 200 up by around 27 per cent from its low in late-March, with even bigger gains on US indices.

“Investors were looking through the very clear evidence we’ve seen of economic damage … there was a lot of optimism and a lot of hope, frankly, that we’d see a ‘V-shaped’ recovery in economies as they came out of lockdown and that there’d be a cure or a vaccine for the virus,” CMC Markets chief strategist Michael McCarthy said.

“That strength that we’d seen and that optimism is being moderated, and it’s quite possible from the falls that we’re seeing over the past 48 hours that we could see further damage over the coming days and weeks.”

There were again heavy losses for banking stocks including ANZ (-4.7pc), the Commonwealth Bank (-3.7pc), NAB (-4.1pc) and Westpac (-5.3pc), as well as smaller banks Bendigo and Adelaide (-6.2pc) and Bank of Queensland (-5.6pc).

“A very steady interest rate environment means [banks] are likely to see margin pressure and, because they’re also leveraged to the economy, they’re part of every industry in that they have business with them, that leverage means that if the economic outlook is deteriorating, so is the outlook for the banks,” Mr McCarthy added.

Energy stocks were hard hit in early trade after oil prices tumbled, including Beach Energy (-7.4pc), Woodside (-6.8pc) and Oil Search (-8.3pc).

The plunge came as world shares took their biggest tumble in five weeks after a sobering outlook from the US Federal Reserve challenged market optimism on the global economy.

Bonds rallied on bets that yet more stimulus would be needed to ensure recovery.

Asia had a 10-day winning streak come to an abrupt finish and Europe’s main bourses opened with a heavy thud on Thursday.

London’s FTSE, Frankfurt’s DAX and Paris’s CAC40 were down more than 2.5 per cent in what for coronavirus-sensitive sectors such as car makers and travel and tourism was a fourth straight day of drops.

MSCI’s 49-country index of world stocks slid 0.75 per cent in its largest daily loss in five weeks, while E-Mini futures for the S&P 500 fell 1.5 per cent to extend the previous session’s pullback on Wall Street.

In a reality check to the stock market’s recent euphoria, the Fed predicted the US economy would shrink 6.5 per cent in 2020 and unemployment would still be at 9.3 per cent at year’s end.

Data had also shown core US consumer prices fell for a third straight month in May, the longest stretch of declines on record.

As a result, Fed Chair Jerome Powell said he was “not even thinking about thinking about raising rates”. Instead, he emphasised recovery would be a long road and that policy would have to be proactive with rates near zero out to 2022.

-with agencies