Financial markets are signaling that investors have lost faith in policy makers' ability to support the global economy.
Turbulence tore through global markets on Thursday as investors sought the safety of Japanese yen, gold and top-rated bonds.
Europe got off to a torrid start, with Britain's FTSE 100 down 2.3 per cent, Germany's DAX 2.4 per cent lower and France's CAC 40 down 2.8 per cent. U.S. futures are also pointing to 1 per cent drop for Wall Street later after Federal Reserve Chair Janet Yellen's interest rate comments failed to inspire lasting gains. Swedish shares slid even as the central bank cut its key interest rate further below zero. The yen leaped to its highest in more than a year. Major sovereign bond markets rallied, pushing U.K. gilt yields to a record low. Gold rose beyond $1,200 an ounce, while U.S. oil traded below $27 a barrel.
Signals by central banks from Europe to Japan that additional stimulus is at the ready are failing to ease investor concern that global growth will keep slowing. Citigroup's Economic Surprise Index already indicates data in Group of 10 economies are falling short of estimates by the most since April 2013, and a selloff in crude oil and weakening credit markets are exacerbating the malaise. Yellen suggested that the central bank might delay, but not abandon, planned interest-rate increases in response to recent turmoil in financial markets.
“Over the last few years when we got bad news, equity markets would rally because they would interpret this as potential for central banks to go more dovish,” said Mohit Kumar, head of rates strategy at Credit Agricole SA's corporate and investment bank unit in London. “Now that correlation is shifting to bad news is actually bad news. Investors are concerned over central banks' policy options given the market is driven by factors over which they have little or no control over.”
The Stoxx Europe 600 Index slid 3.2 per cent at 11:11 a.m. in London, extending its loss this year to 17 per cent as disappointing earnings releases exacerbated bearish sentiment. All industry groups declined, with banks the worst performers.
Societe Generale SA tumbled 12 per cent after reporting that quarterly profit missed estimates as earnings at the investment bank fell and it set aside provisions for potential legal costs.
Rio Tinto Group slipped 4.1 per cent as it scrapped its progressive dividend policy and set out new spending cuts. Zurich Insurance Group AG lost 3.5 per cent after posting a loss. Nokia Oyj dropped 1.4 per cent as it missed sales projections.
The OMX Stockholm 30 Index dropped 3.1 per cent. Sweden's central bank lowered the repo rate to minus 0.50 per cent from minus 0.35 per cent. A cut was predicted by 10 of the 18 analysts surveyed by Bloomberg, though only three had anticipated this magnitude.
“Financial markets are repricing for a global growth slowdown,” said Tim Condon, head of Asian research at ING Groep NV in Singapore. “Expectations that monetary policy would be able to do much have diminished considerably.”
The MSCI All Country World Index slid 0.5 per cent, taking it to within about 0.6 per cent of a bear market.
Standard & Poor's 500 Index futures dropped 1.9 per cent. Contracts on the Dow Jones Industrial Average slid 1.8 per cent after the index declined 0.6 per cent last session amid losses for Walt Disney Co. and International Business Machines Corp. The S&P 500 initially climbed on Yellen's comments, before erasing gains to end Wednesday down less than 0.1 per cent.
The Fed Chair also highlighted uncertainty over the pace of China's growth and the related rout in commodities in her testimony, concerns that have roiled financial markets throughout the year and twice pushed global shares to the brink of a bear market.
The MSCI Emerging Markets Index sank 2.2 per cent, heading for the biggest decline in three weeks, with energy producers leading losses.
As trading resumed in Hong Kong, the Hang Seng Index fell 3.9 per cent, for its worst start to a lunar new year since 1994. The Hang Seng China Enterprises Index of mainland companies slumped 4.9 per cent to its lowest since March 2009. Markets remained closed in mainland China, Taiwan and Vietnam.
Kyle Bass, the hedge fund manager who successfully bet against mortgages during the subprime disaster, said China's banking system may see losses of more than four times those suffered by U.S. banks during the last crisis. Should lenders lose 10 per cent of assets because of nonperforming loans, the nation's banks will see about $3.5 trillion in equity vanish, according to Bass.
Korea's Kospi lost 2.9 per cent as North Korea said it is closing an industrial park jointly run with South Korea, a day after the government in Seoul announced it was pulling out its companies to punish Kim Jong Un for his recent nuclear test and long-range rocket launch.
In Russia, the Micex Index dropped 2.1 per cent as oil retreated, while the Bloomberg GCC 200 Index of Gulf stocks slid 1.7 per cent, extending this week's decline to 3.1 per cent.
India's S&P BSE Sensex lost 3.4 per cent, set to enter a bear market after declining at least 20 per cent from its January 2015 peak. Benchmark gauges in South Africa, Turkey, Poland and Thailand dropped at least 1.5 per cent.
The Russian ruble and South Africa's rand led developing- nation currencies lower with a gauge of 20 exchange rates slipping 0.2 per cent, reversing earlier gains.
The offshore yuan climbed to the strongest level in more than a month after data signaled that China's central bank is supporting the exchange rate.
The extra yield investors demand to own emerging-market debt rather than U.S. Treasuries jumped 12 basis points to 506, the highest since May 2009, according to JPMorgan Chase & Co. indexes.
The yen jumped against all of its 16 major counterparts, rising the most against the currencies of Australia, Norway and New Zealand.
The yen temporarily pared gains after Masatsugu Asakawa, vice minister for international affairs at Japan's finance ministry, said he is watching currency markets to see if moves are speculative. HSBC Holdings Plc earlier warned there's a growing risk the BOJ steps in to sell yen or cut interest rates.
“Markets appear to be testing the resolve of the BOJ and questioning the ability of monetary policy action to create a weakening Japanese yen,” said Sam Tuck, a senior currency strategist at ANZ in Auckland. “Nobody really wants their currency bouncing around too rapidly. That in itself, irrespective of the level, does suggest that there could be some smoothing action just to slow it down.”
Yields on U.S. 10-year Treasuries slipped five basis points, or 0.05 per centage point, to 1.62 per cent, having slid earlier to the lowest since December 2012.
Yellen added fuel to this year's bond rally by suggesting on Wednesday the central bank may delay raising interest rates. She is scheduled to conclude a two-day appearance before U.S. lawmakers Thursday in Washington. The U.S. plans to sell $15 billion of 30-year bonds.
The 10-year gilt yield fell to a record-low 1.296 per cent. The yield on German 10-year bunds slid to as little as 0.16 per cent, the least since April, and HSBC said it may drop to as low as 0.05 per cent in the next four months. A gauge of the euro region's inflation outlook reached the lowest on record.
The cost of insuring corporate debt rose, resuming an increase that has pushed indexes to the highest since 2013. The Markit iTraxx Europe Index of credit-default swaps on investment-grade companies climbed five basis points to 123 basis points. A gauge of swap on junk-rated companies jumped 29 basis points to 483 basis points. Measures of swaps on financial companies' senior and junior debt also climbed.
Oil extended losses from the lowest close in three weeks as crude stockpiles at the delivery point for New York futures expanded to a record, although nationwide supplies slipped. West Texas Intermediate fell 3.7 per cent to $26.44 a barrel and Brent lost 1.6 per cent to $30.35.
Gold rallied 2.4 per cent to $1,226.38 an ounce after Yellen's comments burnished the investment case for the metal that's been the best performing commodity in 2016. Silver rose 2.3 per cent and platinum added 1.3 per cent.