A wave of risk aversion hit financial markets, pushing world stocks to their lowest in more than two years, and knocking European currencies and oil as fears about the slowing global economy intensified.
Safe-haven assets such as yen and government bonds benefited after Wall Street had its steepest decline in more than two months as weak US labor market data boosted nervousness about a closely-watched monthly jobs report later in the day.
Bank stocks took a hit after the European Central Bank tightened rules on the assets banks can submit as collateral in central bank lending operations following concern that its rules have been open to misuse.
Risk aversion also hit emerging markets - which have already been under pressure in recent weeks on rising political and economic risk - with benchmark emerging stocks hitting a 17-month low. “Global deleveraging remains the dominant theme in markets as the economic and financial sector news continues to disappoint,” noted Mitul Kotecha, head of FX strategy at Calyon. “The path of destruction that this deleveraging is causing was evident in the slide in US equities and subsequent decline in Asian equity markets.”
The FTSEurofirst 300 index fell 0.7%, following even steeper moves in Asian stocks.
The MSCI main world equity index dropped 0.8%, hitting its lowest since July 2006. The index has made six sessions of consecutive losses and already lost 5.6% since the start of the month.
European banking shares fell 1.5%. The ECB is set to increase the safety margin it takes in valuing assets, known as the haircut, to 12% across the board for all asset-backed securities (ABS) which banks deposit with the ECB to receive short-term funding and access payment systems.
Analysts say the changes would make it less attractive for banks to use ABS as collateral and would push up the overall cost of borrowing funds from the central bank.
European currencies extended their recent decline on concerns that economies outside the United States are deteriorating, especially in Europe - which is facing recession.
The euro had fallen to a 10-month low of $1.4212 on the EBS system while sterling hit a 12-year low on a trade-weighted basis.
The low-yielding yen surged to a 13-month high around 150.60 per euro while it hit two-year lows against the Australian and New Zealand dollars. The dollar fell 0.15% against a basket of major currencies.
“Position unwinding is taking place globally and it is becoming a big wave,” said Tokichi Ito, deputy general manager of foreign exchange at the Trust & Custody Services Bank in Japan.
Emerging sovereign spreads widened 5 basis points to trade 326 basis points above US Treasuries. Emerging stocks lost 1.7%.
The September Bund future rose 13 ticks, benefiting from flows into safe-haven government bonds. (Reuters)