Asian shares tumbled on Wednesday as oil prices dropped for a third day, prompting investors to seek shelter in safe-haven assets and lifting bonds and gold to multi-month highs.
The MSCI’s broadest index of Asia-Pacific shares outside Japan fell 2.1 percent led by a 2.7 percent fall in Hong Kong shares.
Japan’s Nikkei lost 3.2 percent, wiping out almost all of its gains made after the Bank of Japan on Friday had announced it would introduce negative interest rates. Overnight, the U.S. S&P 500 index fell 1.9 percent.
The selloff is likely to extend into the European session, with spread-betters expecting Germany’s DAX and France’s CAC 40 to lose as much as 1.1 percent each and Britain’s FTSE 0.9 percent.
“There’s no sign of improvement in the oil market. Demand is slowing in many emerging markets and in the U.S, which is the world’s biggest consumer, oil inventories stood high,” said Shuji Shirota, head of macro economic strategy at HSBC in Tokyo.
Brent crude futures, the world’s oil benchmark, fell 0.7 percent to $32.48 per barrel, extending losses so far this week to more than 6 percent. U.S. crude futures slipped 0.5 percent.
Hopes for an agreement to cut production dimmed this week as no deal has emerged and talks between Russia’s energy minister and Venezuela’s oil minister on Monday failed to result in any clear plan to reduce output.
Oil prices have fallen about 70 percent in the past 18 months, largely due to a growing supply glut but also exacerbated by cooling economic growth in China and other emerging markets.
Although a private survey on China’s services sector on Wednesday showed growth picked up to a six-month high in January, that was a drop in the bucket in markets full of pessimism on the global economy.
The gloom pervading markets bolstered the allure of government debt. As U.S. debt prices jumped, the 10-year U.S. yield hit a 10-month low of 1.828 percent.
Uncertainty around global growth has prompted investors to slash back their expectation of future U.S. rate hikes, with Federal funds rate futures now pricing in only about a 50 percent chance of just one rate hike this year.
That stood in stark contrast to the projection by the Fed’s policy board members that rates could rise four times.
Japanese bond yields also kept falling as the market deals with the ramifications of the BOJ’s decision to charge interest on a portion of excess reserves, with the 10-year JGB yield hitting a record low of 0.045 percent.
The two-year JGB yield sank to minus 0.190 percent .
Dwindling bond yields around the globe made precious metals, which pay no interest, an attractive asset for many investors, especially at a time when central banks in Japan and Europe are now adopting negative interest rates.
Gold hit a three-month high of $1,130.90 per ounce on Tuesday and last stood at $1,128.3.
In the currency market, the safe-haven yen strengthened 0.3 percent against the dollar to 119.56 while the euro was little changed at $1.0918.
The Chinese yuan slipped to its weakest level in three weeks in offshore trade to 6.6451 yuan to the dollar, although it was stable in a more tightly-controlled onshore market.
Bets on further weakness in the yuan gathered momentum in derivative markets, with its three-month implied volatility rising to record levels.
The prospects of a weaker yuan put pressure on Asian currencies. The Korean won fell one percent to its lowest level since July 2010, changing hands at 1,221.1 won to the dollar .
“We are bearish on Asia FX this year and look to buy USD/Asia FX on dips,” said Qi Gao, an emerging Asian currency strategist for Scotiabank in Hong Kong.
“A recovery in China, modest rise in oil prices, freezing of the Fed funds rate and a large size of QE or QQE by the ECB and BOJ could send Asian currencies higher. But it does not seem possible in the first half,” Gao said.
Investors are now anxiously awaiting U.S. economic data in coming days, starting from the services sector survey due later in the day.
“The U.S. economic data has been soft especially in the manufacturing sector so the key is how much the services sector is holding out,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.
The U.S. ISM non-manufacturing PMI is expected to dip to 55.1 in January from 55.8 in December. That would be the lowest reading in almost two years but still above the 50 mark that separates contraction and expansion.