SYDNEY Asian share markets were scorched on Tuesday as stability concerns put a torch to European bank stocks and sent investors stampeding to only the safest of safe-haven assets.
As fear overwhelmed greed, yields on longer-term Japanese bonds fell below zero for the first time, the yen surged to a 15-month peak and gold reached its most precious since June.
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 1.2 percent, with Australian shares hitting 2-1/2-year closing low, and would have been lower if not for holidays in many centres.
Spread-betters see another weak session in European shares, where German DAX is seen falling 0.7 percent and Britain's FTSE 0.5 percent.
S&P 500 e-mini futures fell more than 1 percent at one point.
"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 magnified the stakes for U.S. Federal Reserve Chair Janet Yellen's testimony this week.
"She needs to come across as optimistic without being too hawkish and cautious without being negative," said Masters. "Hawkishness or dovishness could easily exacerbate the current sell-off, tightening financial conditions further."
Wall Street pared losses but still ended deep in the red. The Dow lost 1.1 percent, while the S&P 500 fell 1.42 percent and the Nasdaq 1.82 percent.
The rout began in Europe on Monday, when the FTSEurofirst 300 index shed 3.4 percent to its lowest since late 2013, led by a near 6 percent dive in the banking sector.
Deutsche Bank alone sank 9.5 percent as concerns mounted about its ability to maintain bond payments. Late Monday, the German bank said it has "sufficient" reserves to make due payments this year on AT1 securities.
The cost of insuring bank debt against default also climbed to its highest since late 2013. Borrowing costs in Spain, Portugal and Italy jumped as investors demanded a fatter risk premium over safer German paper, where two-year yields hit record lows at minus 52 basis points.
"The 'fear factor' in markets has morphed from being about an emerging market hard-landing and collapsing oil prices to being about the extent of the slowdown in the developed world and the ability of central banks to reflate asset values yet again," analysts at Citi said in a note.
The Bank of Japan's recent shift to negative rates has fuelled concerns that ever-more exotic monetary policy is rapidly reaching the point of diminishing returns.
Yet murmurings about the risk of recession in the United Sates has also led investors to wager the Federal Reserve will have to slow, or suspend altogether, plans to normalise rates.
Futures markets have priced out any chance of a hike in March and imply a funds rate of just 0.43 percent by December. The current effective funds rate is 0.38 percent.
That has pulled down 10-year Treasury yields to their lowest since early 2015 at 1.69 percent and undermined bullish bets on the U.S. dollar.
It touched a six-week trough on the Swiss franc, while the euro edged up to $1.1217. Against a basket of currencies, the dollar eased 0.1 percent to 96.485.
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 far as to 114.205 yen, having been above 121 just a week ago, while the euro fell as much as one percent to 128.31 yen.
The yield on Japan's benchmark 10-year government bond turned negative for the first time as the Nikkei stock index tumbled.
The 10-year JGB yield touched minus 0.010 percent. It was the first time a G7 nation's 10-year government bond yield has turned negative, although yields on German bunds have come relatively close.
With more and more sovereign bonds paying negative rates, the relative cost of holding gold has seemed less and less of a burden. The metal reached its strongest since June at $1,200.60 an ounce, and last traded at $1,193.60.
Oil prices bounced slightly after three sessions of losses. Brent futures added 11 cents to $32.99 a barrel, while U.S. crude rose 34 cents at $30.03.
(Additional reporting by Hideyuki Sano in TOKYO; Reporting by Wayne Cole; Editing by Eric Meijer and Kim Coghill)