As fear
overwhelmed greed, yields on longer-term Japanese bonds fell below zero
for the first time, the yen surged to a 15-month peak and gold reached
its most precious since June.
Japanese
Finance Minister Taro Aso felt moved enough to warn the yen's rise was
"rough", something of an understatement as the Nikkei (.N225) nosedived
5.4 percent.
MSCI's
broadest index of Asia-Pacific shares outside Japan fell 1.2 percent,
with Australian shares hitting 2-1/2-year closing low, and would have
been lower if not for holidays in many centres.
Spread-betters
see another weak session in European shares, where German DAX (.GDAX)
is seen falling 0.7 percent and Britain's FTSE (.FTSE) 0.5 percent.
S&P 500 e-mini futures (ESc1) fell more than 1 percent at one point.
"Sentiment
towards risk assets remained extremely bearish and price action
reflected a market that may be capitulating," said Jo Masters, a senior
economist at ANZ.
All of which magnified the stakes for U.S. Federal Reserve Chair Janet Yellen's testimony this week.
"She
needs to come across as optimistic without being too hawkish and
cautious without being negative," said Masters. "Hawkishness or
dovishness could easily exacerbate the current sell-off, tightening
financial conditions further."
Wall
Street pared losses but still ended deep in the red. The Dow (.DJI)
lost 1.1 percent, while the S&P 500 (.SPX) fell 1.42 percent and the
Nasdaq (.IXIC) 1.82 percent. [.N]
The
rout began in Europe on Monday, when the FTSEurofirst 300 (.FTEU3)
index shed 3.4 percent to its lowest since late 2013, led by a near 6
percent dive in the banking sector (.SX7P).
Deutsche
Bank (DBKGn.DE) alone sank 9.5 percent as concerns mounted about its
ability to maintain bond payments. Late Monday, the German bank said it
has "sufficient" reserves to make due payments this year on AT1
securities.
The
cost of insuring bank debt against default also climbed to its highest
since late 2013. Borrowing costs in Spain, Portugal and Italy jumped as
investors demanded a fatter risk premium over safer German paper, where
two-year yields hit record lows at minus 52 basis points.
FEAR FACTOR
"The
'fear factor' in markets has morphed from being about an emerging
market hard-landing and collapsing oil prices to being about the extent
of the slowdown in the developed world and the ability of central banks
to reflate asset values yet again," analysts at Citi said in a note.
The
Bank of Japan's recent shift to negative rates has fuelled concerns
that ever-more exotic monetary policy is rapidly reaching the point of
diminishing returns.
Yet
murmurings about the risk of recession in the United Sates has also led
investors to wager the Federal Reserve will have to slow, or suspend
altogether, plans to normalise rates.
Futures
markets have priced out any chance of a hike in March and imply a funds
rate of just 0.43 percent by December . The current effective funds
rate is 0.38 percent.
That has pulled down 10-year Treasury yields to their lowest since early 2015 at 1.69 percent and undermined bullish bets on the U.S. dollar.
It
touched a six-week trough on the Swiss franc (CHF=), while the euro
edged up to $1.1217 (EUR=). Against a basket of currencies, the dollar
eased 0.1 percent to 96.485 (.DXY).
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 far as to 114.205 yen (JPY=), having been above 121 just a week ago, while the euro fell as much as one percent to 128.31 yen (EURJPY=).
The yield on Japan's benchmark 10-year government bond turned negative for the first time as the Nikkei stock index tumbled.
The
10-year JGB yield touched minus 0.010 percent. It was the first time a
G7 nation's 10-year government bond yield has turned negative, although
yields on German bunds have come relatively close.
With
more and more sovereign bonds paying negative rates, the relative cost
of holding gold has seemed less and less of a burden. The metal (XAU=)
reached its strongest since June at $1,200.60 an ounce, and last traded
at $1,193.60.
Oil
prices bounced slightly after three sessions of losses. Brent futures
(LCOc1) added 11 cents to $32.99 a barrel, while U.S. crude (CLc1) rose
34 cents at $30.03.
By: Wayne Cole (Reuters, SYDNEY).
Additional Reporting: Hideyuki Sano (TOKYO).
Reporting: Wayne Cole.
Editing: Eric Meijer and Kim Coghill.
Review: Emerging Market Formulations &
Research Unit, Flagship Records.
For The #FacebookTeam