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Are Markets Facing a Crisis of Confidence?

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The rout in global financial markets that has spared few asset classes extended into Thursday, with Asian stocks plunging across the board, led by a 6 percent fall in Japan's benchmark Nikkei 225 in the morning session.

With investors dumping assets ranging from bonds, currencies to equities, there appears to be a lack of hope among investors that central bank policies can generate real economic recovery, said strategists.

"We are seeing the first signs of a lack of confidence in the ability of central banks to control the interest rates, to stimulate inflation, and real GDP [gross domestic product] growth rates," Viktor Shvets, head of strategy research, Asia, at Macquarie, told CNBC Asia's "Squawk Box" on Thursday.

"We had all sorts of QEs [quantitative easing] of various forms for the last five years and if you look at inflation all around the world it's falling - whether it's the U.S., euro zone, Asia Pacific, emerging markets. I think that's a problem," he added.

(Read More: A Silver Lining for the Volatile Nikkei)

Japan's Nikkei 225 plunged as much as 6.2 percent, reentering bear territory - which is defined as a 20 percent decline from a recent high. Australia's S&P/ASX 200, meantime, fell over 1 percent, hitting a five-and-a-half month low.

This came on the heels of a sell-off in European and U.S. stocks on Wednesday, with the Dow posting its first three-day losing streak for the year amid concerns over the Federal Reserve scaling back its bond buying program.

Uncertainty over the timing of the Fed's next moves, also, weighed on the U.S. dollar which fell to a near four month low against a basket of major currencies on Thursday.

(Read More: Nikkei Bull Run Over, May Test 11,500: Chart)

"The storm clouds are building: the Dow has just suffered its first three-day losing streak for the year, the Chicago VIX [volatility] index has climbed further; Europe is sliding off its highs; China is slowing down faster than expected, and the BOJ [Bank of Japan] is holding the line on additional stimulus action," wrote Evan Lucas, market strategist at trading firm IG Markets.

Concerns over the pace of the global economic recovery were heightened after the World Bank cut its outlook for global growth late Wednesday, saying the world economy should expand more slowly this year than last due to a deeper-than-expected recession in Europe and a recent slowdown in some emerging markets.

"The feeling of déjà vu right now is enormous," Lucas said, noting that, "2010 saw a flare-up in the hangover of the Global Financial Crisis - credit issues saw investors heading for the hills. In March 2011, Japan suffered a devastating tsunami, coupled with the start of the euro crisis and the formation of acronym PIIGS [five weak euro some economies Portugal, Italy, Ireland, Greece and Spain]."

Taking Away the Punch Bowl

Hans Goetti, chief investment officer Asia at wealth management firm Finaport said it is becoming increasingly clear that the rally over the past two years has been driven by the ultra-loose monetary policy of major central banks.

(Read More: Market May Be Overpricing Risk of Fed Tapering)

"We've been living in an environment where economically speaking, bad news was good news because bad news meant more monetary stimulus. The rally that we have had over the past one-and-a-half years has been mainly driven by central banks and now the punch bowl is about to be taken away," he said.

But Shvets of Macquarie says investors could be getting ahead of themselves given that the Fed has yet to provide clarity on its plans for tapering.

(Read More: Fed Tapering a Big Issue for the World: Zoellick)

"So the market is tightening on behalf of Fed, before Fed or any other central bank decided that they actually want to tighten the cycle," he added, referring to the rise in U.S. 10-year treasury yields which touched a 14-month high 2.23 on Wednesday.

By CNBC's Ansuya Harjani

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