Yen, Bonds, Gold All Gain at Dollar’s Expense, Stocks Sag

Fresh cracks appeared in global markets on Thursday as investors sought the safety of the Japanese yen, gold and top-rated bonds while dumping U.S. dollars on bets the Federal Reserve could be done raising interest rates.

Even the absence of Tokyo for a bank holiday could not stop the dollar from hitting a 15-month low on the yen, and gold finally broke major chart resistance to reach its highest since May.

Financial spreadbetters expected Britain’s FTSE 100 to open down 1 percent, Germany’s DAX 1.4 percent lower and France’s CAC 40 down 1.5 percent.

EMini futures for the S&P 500 fell 0.7 percent, suggesting a weak opening on Wall Street as well.

Insatiable demand for U.S. Treasuries drove longer-term yields to one-year lows and flattened the yield curve in a way that has presaged economic recession in the past.

“In some ways it is reminiscent of 2008 with tightening credit markets, bank shares under pressure and worries central banks are powerless,” said Shane Oliver, head of investment strategy at AMP Capital, though he suspects markets are overly pessimistic this time.

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 a long vacation. 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 preset 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?”

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 1.673 percent, from a top of 1.773, almost exactly matching the lowest close from February last year. Futures imply further price gains lie ahead.

As a result, the spread over two-year paper shrank to just 98 basis points, the smallest gap since late 2007 just before the global financial crisis hit.

Likewise, Fed fund futures 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 inexorable 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 dove through 113.00 yen to reach depths not delved since November 2014 at 112.515.

The euro also weakened against its Japanese peer, sliding to a near three-week low of 127.26 yen. Against the greenback, the euro held firm at $1.1292 and within reach of a three-month high of $1.13385 set earlier in the week.

The aversion to risk helped lift gold as far as $1,213.00 an ounce, clearing stiff resistance around $1,200.

Oil prices resumed their decline as U.S. crude slid 47 cents to $26.98 a barrel, while Brent futures lost 18 cents to $30.66.