Wellington - Global stocks extended a rout as European shares declined after equities in Tokyo slumped by the most since August. The yen reached its strongest since 2014, Japan’s 10-year yield dropped below zero for the first time and corporate bond risk climbed.
The Stoxx Europe 600 Index fell 0.6 percent as of 8.35am in London as US index futures retreated. Banks tumbled in Tokyo after Deutsche Bank AG shares and debt slumped Monday amid questions over the lender’s ability to pay coupons on its riskiest bonds. Treasuries headed for their best start to a year since 1988. Gold was on track for its longest rally since 2011 as the yen surpassed 115 per dollar. Oil traded at about $30 a barrel.
“Investors had probably thought yesterday we might have hit bottom but they’ve been crushed,” said Nobuyuki Fujimoto, a senior market analyst at SBI Securities in Tokyo. “Greece, Deutsche Bank, shale gas - all we hear is bad news. Investors must have their heads in their hands right now.”
Traders have unwound bets for the Federal Reserve to raise interest rates this year as concern intensified over China’s capacity to deal with its slowing economy, and the impact of Japan’s imposition of negative interest rates. The distress that has brought global equities to the brink of a bear market in 2016 is flaring in the credit space, with the cost of protecting against company defaults worldwide surging.
Markets in mainland China, Hong Kong, South Korea, Malaysia, Singapore and Taiwan are closed for the New Year holiday Tuesday.
Japan’s Topix index tumbled 5.5 percent in Tokyo, falling the most since August 24 as banks and financial shares led losses. The Nikkei 225 Stock Average dropped 5.4 percent, its biggest decline since June 2013.
“The yen is rising while US Treasury yields are falling and gold prices are rising. Basically it’s showing a risk-averse market sentiment,” Toshihiko Matsuno, chief strategist at SMBC Friend Securities in Tokyo, said by phone. “With increased concerns of a slowdown in inflation in the US as well, market sentiment is being shaken.”
Energy and banking shares led Australia’s S&P/ASX 200 Index down 2.9 percent. The S&P/NZX 50 Index in Wellington lost 1.3 percent in its first day of trading this week.
MSCI’s All-Country World Index fell 0.6 percent, leaving it down 19 percent from a peak reached in May. Most investors regard a 20 percent retreat from a peak as the definition of a bear market.
Futures on the Standard & Poor’s 500 Index slumped 0.5 percent while contracts on the Nasdaq 100 Index fell 0.4 percent.
Equity losses took hold in Europe on Monday, with banks driving the Stoxx Europe 600 Index to its lowest since October 2014. Deutsche Bank tumbled 9.5 percent as analysts at CreditSights said it may struggle to pay coupons on its riskiest bonds next year should operating results disappoint or the cost of litigation be higher than expected. The lender said it has sufficient capacity this year and next.
While paring declines in the last hour of trading, the S&P 500 still ended Monday down 1.4 percent. The Nasdaq Composite Index neared a bear market as some of the biggest tech stocks dropped, bringing the gauge’s decline from a July record to 18 percent.
Government bonds surged, with the yield on 10-year Japanese notes touching minus 0.035 percent in Tokyo. Treasuries also rallied, sending the benchmark 10-year yield for US debt to a one-year low of 1.68 percent. The rate has dropped 54 basis points since December 31, the strongest rally by this time of year since a 71 basis point slide to February 9, 1988.
Ten-year bund yields fell below 0.2 percent for the first time since April, after data showed German industrial production unexpectedly fell for a second month in December, dropping by 1.2 percent from the prior month.
Similar-dated Australian government yields fell 18 basis points on Tuesday in Sydney to 2.41 percent, the steepest slide since June 2013, while 10-year New Zealand yields dropped to a record 3.01 percent.
Japan’s 10-year yield has declined from 0.22 percent on January 28, the day before the central bank unexpectedly announced it would lower rates on excess reserves to minus 0.1 percent.
About 29 percent of the outstanding debt in the Bloomberg Global Developed Sovereign Bond index was yielding less than zero as of 5pm in New York on Monday. Swiss 3 percent notes due in 2018 were offering the lowest yield in the index, according to data compiled by Bloomberg.
Gauges of credit risk in Japan and Australia rose to the highest in at least two years. The iTraxx Japan index jumped 8 basis points to 103 basis points as of 12.49pm in Tokyo, according to Citigroup pricing. The index hasn’t been that high since July 2013, based on CMA data. The Australian CDS gauge climbed 10 basis points to 169 basis points as of 2.51pm in Sydney, Australia & New Zealand Banking Group prices showed. The index last closed higher in September 2012, CMA data indicate.
The yen strengthened past 115 per dollar for the first time in more than a year and climbed against all its major peers. It was up 0.5 percent to 115.23 recently.
The Australian and New Zealand dollars each dropped at least 0.4 percent, while the euro was little changed at $1.1198.
Gold rose for an eighth day, gaining 0.3 percent after trading above $1,200 an ounce on Monday for the first time since June. Prices are extending a rally that’s made the metal the best performing commodity this year.
Zinc led most industrial metals higher, rising 1.9 percent for a second day of gains. Aluminium gained 1.3 percent.
Oil in New York snapped a three-day losing streak, rebounding from a close below $30 for the second time in less than a week. West Texas Intermediate crude rose 2.5 percent to $30.44 a barrel.
* With assistance from Garfield Reynolds, Chikako Mogi, Kevin Buckland, Benjamin Purvis and Yuji Nakamura