European shares gave up early gains as bank stocks dropped and losses in Asian markets sent investors scurrying for safe havens.
The pan-European FTSEurofirst 300 dipped 0.1 percent and then levelled off, after touching its lowest levels since October 2014, and still near its lowest close since 2013.
The index had started in positive territory, but bank stocks reversed early gains. STOXX Europe 600 banks were down 1.6 percent, and shares in several Italian banks were suspended from trading after dropping sharply.
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.
However, there were some signs of stabilization. Deutsche Bank rose 1.2 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 .
Many investors believed that signs of stress in the market for credit default swaps pointed to further declines ahead.
“The CDS market is indicating a future financial stress for bond holders in the banking sector. There are concerns that the banking sector is under-capitalized in Europe and credit conditions are sub-optimal,” said Lorne Baring, managing director of B Capital Wealth Management. Slowing global growth was clouding the outlook further, he added.
“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. We are advising our investors to drastically reduce risk and build protection.”
Other growth-sensitive sectors, such as basic resources, also came under pressure, although most major commodities were up.
U.S. crude oil rose 2.3 percent to $30.37. Brent crude rose over 1 percent. Copper edged higher in quiet trade, with top consumer China on holiday.
Gold benefited from the risk-off sentiment, edging higher and set for its eighth straight day of gains. That would mark its longest winning run since 2011.
S&P 500 e-mini futures were down 0.3 percent.
In all, world stocks fell 0.6 percent. Asia saw the biggest losses, tracking the declines in European and U.S. shares on Monday.
Japanese Finance Minister Taro Aso felt moved enough to warn 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 bank holidays in many centers.
“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 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,” Masters said. “Hawkishness or dovishness could easily exacerbate the current sell-off, tightening financial conditions further.”
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 Sates 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 on the Swiss franc, while the euro hit a two-week low against the franc. Against a basket of currencies, the dollar was flat at 96.593.
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 1 percent to 128.31 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 bonds have come close.
Southern European bond yields pulled back from multimonth 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 .