|
 Investors were spooked by worries over the direction of the global
economy and by cautious comments from the head of the U.S. Federal
Reserve that were taken to mean no near-term interest rate hikes.
European stocks fell over 3 percent to a 2-1/2 year low with
banks plunging 6 percent and the Swedish crown tumbling as its
central bank waded in with a surprise cut to its already deeply
negative interest rates.
Britain's FTSE 100 dropped 2.5 percent, Germany's DAX fell 3
percent, and Italian and Greek shares both lost 5 percent on
their familiar banking sector and bailout worries.
The pace wasn't expected to let up. Wall Street was expected to
start almost 2 percent in the red and demand for U.S. Treasuries
drove longer-term yields to three-year lows and flattened the yield
curve in a way that has presaged economic recession in the past.
"What this shows is that the risk-off mode has come back very
quickly and that the worst may still be to come in these markets,"
said Rabobank European strategist Emile Cardon.
"What is different to previous times is that the bad news in now
coming from everywhere, China, Portugal the U.S. the commodity
sector the banking sector. It's like several smaller crises could
combine into one big crisis."
Benchmark European German Bund yields dropped and UK yields hit an
all-time low too, as traders dumping riskier assets sent Spanish,
Italian, and Portuguese bonds in the opposite direction.
The euro zone's finance ministers are set to meet later with worries
creeping back in about Greece and Portugal's ability to stick to the
terms of their bailouts again as well. Portuguese bonds saw their
biggest selloff in 2-1/2 years.
YELLEN
The flight from risk told on most Asian shares, with Hong Kong - a
favorite channel for global investors to play China - diving 4.2
percent as investors there returned from the long Lunar New year
holidays. Mainland China markets are closed all week.
MSCI's broadest index of Asia-Pacific shares outside Japan shed 1.4
percent, and South Korea resumed with a 2.9 percent drop.
Wall Street had ended Wednesday mixed after Fed Chair Janet Yellen
sounded optimistic on the U.S. economy, but acknowledged risks from
market turmoil and a slowdown in China.
Analysts took that to mean a hike in March was unlikely, but further
tightening remained possible later in the year.
"Yellen made it clear that while the Fed still expects to continue
on its gradual tightening path, policy was not on a pre-set course
and would respond appropriately to developments," said Justin Fabo,
a senior economist at ANZ.
"The real test may come later, if markets continue to deteriorate
and look to central banks to save them. Are policymakers' guns
loaded with blanks?"
[to top of second column] |
YIELDS STEAM ROLLERED
It seemed some were already preparing for the worst.
Longer-term U.S. debt rallied hard as investors wagered that either
the Fed would be unable to tighten at even a gradual pace, or that
if it did hike it would only hasten the arrival of recession and
deflation.
In a marked turnaround, yields on 10-year Treasuries fell to 1.6330
percent, from a top of 1.773, and back to lows last seen at the end
of 2012 when the Fed was busily printing money. Futures imply
further price gains lie ahead.
As a result, the spread over two-year paper shrank to just 96
basis points, the smallest gap since late 2007 just before the
global financial crisis hit.
Likewise, Fed fund futures <0#FF:> are pricing in the shallowest of
shallow tightening paths. The market implies a rate of 45 basis
points for the end of this year, 60 basis points at the end of 2017
and 90 by the close of 2018.
The decline in U.S. yields continued to drag on the dollar, which
reached lows last seen in October against a basket of currencies.
The yen was again lifted by safe-haven flows, as befits Japan's
position as the world's largest creditor nation. The dollar sliced
down to 111.36 yen to reach depths not delved since October 2014 at
110.99.
The euro also weakened against its Japanese peer, sliding to a 2-1/2
year low of 126.06 yen . Against the greenback though, the euro
drove as high as $1.1355, its highest in three months.
The aversion to risk helped lift gold <XAU=> as far as $1,217.00 an
ounce, clearing stiff resistance around $1,200.
Oil prices, another recent source of market volatility, resumed
their decline as U.S. crude <CLc1> slid $1 to $26.37 a barrel, while
Brent futures <LCOc1> lost 48 cents to $30.37.
(Additional reporting by Wayne Cole in Sydney; Editing by Raissa
Kasolowsky)
[© 2016 Thomson Reuters. All rights
reserved.] Copyright 2016 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.
 |
