Global stocks hit the rocks after Asian markets slump
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 .FTEU3 dipped 0.1 percent and then leveled 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 .SX7P 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 (DBKGn.DE) 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 .SXPP, also came under pressure, although most major commodities were up.
US 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 ESc1 were down 0.3 percent.
In all, world stocks .WORLD 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 .N225 nosedived 5.4 percent.
MSCI's broadest index of AsiaPacific shares outside Japan .MIAPJ0000PUS fell 1.1 percent. Australian shares hit a 2 1/2-year closing low and would have been lower if not for 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 semiannual testimony before Congress this week. "She needs to come across as optimistic without being too hawkish and cautious without being negative," Masters said.