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 After a choppy morning, the pan-European FTSEurofirst 300
flattened out, having touched its lowest levels since October 2014
in early trade. It remained near its Monday close, the lowest since
2013.
Bank stocks reversed early gains, leaving the STOXX Europe 600 bank
sector down 6 percent so far this week. Shares in several Italian
banks were suspended from trading after dropping sharply. Other
growth-sensitive sectors, such as basic resources, also came under
pressure.
In all, world stocks fell 0.4 percent, although S&P 500 e-mini
futures were flat.
The search for shelter pushed up the Japanese yen, long considered a
safe-haven asset, and drove the yield on Japan's benchmark
government bond into negative territory for the first time ever.
Many investors believed that signs of stress in the market for
credit default swaps pointed to further declines ahead.
"There is a high probability of a further correction in equity
prices, led by banking and energy stocks. There could be a wave of
defaults in the energy sector and that will damage the balance sheet
of the banking sector," said Lorne Baring, managing director of B
Capital Wealth Management. Slowing global growth was clouding the
outlook further, he added.
"We are advising our investors to drastically reduce risk and build
protection."
However, there were some signs of stabilization. Deutsche Bank <DBKGn.DE>
rose 1.4 percent after sinking 9.5 percent on Monday. Late Monday,
the German bank said it has "sufficient" reserves to make payments
due this year on AT1 securities, after concern had mounted about its
ability to maintain bond payments.
Strategists at Goldman Sachs said banks had enough liquidity and
that recent capital hikes should reduce the risk of a financial
crisis re-run.
On Tuesday, Asian shares saw the biggest losses, tracking the
declines in European and U.S. shares on Monday. Japanese Finance
Minister Taro Aso warned the yen's rise was "rough", something of an
understatement as the Nikkei nosedived 5.4 percent.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.1
percent. Australian shares hit a 2 1/2-year closing low and would
have been lower if not for holidays in many centers.
All of which raises the stakes for U.S. Federal Reserve Chair Janet
Yellen when she gives her semi-annual testimony before Congress this
week.
"She needs to come across as optimistic without being too hawkish
and cautious without being negative," said Jo Masters, a senior
economist at ANZ. "Hawkishness or dovishness could easily exacerbate
the current sell-off, tightening financial conditions further."
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U.S. crude oil rose 2.7 percent to $30.49 and Brent crude rose 1.5
percent. Copper edged higher in quiet trade, with top consumer China
on holiday. Gold benefited from the risk-off sentiment and reached a
seven-month high, then edged lower as stocks stabilized and looked
set to end a seven-day winning run.
MURMURS OF RECESSION
The Bank of Japan's recent shift to negative rates has raised
concern that exotic monetary policy is reaching the point of
diminishing returns. But talk about a possible recession in the
United States has also led to speculation the Federal Reserve will
have to slow or suspend plans to normalize rates.
That has pulled 10-year Treasury yields to their lowest since early
2015 and weakened the U.S. dollar, which touched a six-week trough
against the Swiss franc as the euro hit a two-week low against the
franc. Against a basket of currencies, the dollar edged down 0.1
percent to at 96.494.
While the euro was flat against the dollar, bets on volatility ahead
for euro-dollar exchange rates surged to a two-month high of 11
percent, as traders bet more on the dollar. That flipped most
derivatives pricing in favor of a weaker euro over the next few
months.
By the far the biggest mover was the yen, long considered a safe
haven given Japan's position as the world's top creditor nation. The
dollar dived as low as 114.22 yen from above 121 a week ago. The
euro fell as much as one percent to 128.24 yen.
The yield on Japan's benchmark 10-year government bond touched
minus 0.010 percent as the Nikkei stock index tumbled. It was the
first time a G7 nation's 10-year government bond yield reached minus
numbers, although yields on German bunds have come close.
Southern European bond yields pulled back from multi-month highs on
Tuesday, showing some signs of stabilization a day after concerns
about global growth and the health of Europe's banks triggered heavy
selling.
Such concerns have also seen one market measure of long-term euro
zone inflation expectations fall to a record low.
(Additional reporting by Atul Prakash, editing by Larry King)
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