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Global stock rout extends to Japan, credit risk climbs

Wellington - The global stocks rout intensified with equities in Tokyo sliding the most since August and index futures indicating US stocks will add to declines that sent the Standard & Poor’s 500 Index to a 22-month low. The yen reached its strongest since 2014 and corporate bond risk climbed.

Stock gauges in Japan and Australia slumped and US index futures slid at least 0.8%. Markets from China to South Korea remained closed for Lunar New Year holidays.

Evidence of mounting distress in global credit markets boosted government debt, with yields 10-year Japanese bonds tumbling as much as 5 basis points to below zero and Treasuries heading 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. Deutsche Bank AG shares and debt slumped Monday amid questions over the lender’s ability to pay coupons on its riskiest bonds.

Markets in mainland China, Hong Kong, South Korea, Malaysia, Singapore and Taiwan are closed for the New Year holiday on Tuesday.

Stocks

Japan’s Topix index tumbled 5.5% in Tokyo, falling the most since August 24 as banks and financial shares led losses. The Nikkei 225 Stock Average dropped 5.4%, 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%. The S&P/NZX 50 Index in Wellington lost 1.3% in its first day of trading this week.

MSCI’s All-Country World Index fell 0.4%, leaving it down 19% from a peak reached in May. Most investors regard a 20% retreat from a peak as the definition of a bear market.

Futures on the Standard & Poor’s 500 Index declined 0.9% with those on the Dow Jones Industrial Average and contracts on the Nasdaq 100 Index.

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% 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 on Monday down 1.4%. 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%.

Bonds

Government bonds surged, with the yield on 10-year Japanese notes touching minus 0.035% in Tokyo. Treasuries also rallied, sending the benchmark 10-year yield for US debt to a one-year low of 1.68%. The rate has dropped 58 basis points since December 31, the strongest rally by this time of year since a 71 basis point slide to February 9, 1988.

Similar-dated Australian government yields fell 18 basis points on Tuesday in Sydney to 2.41%, the steepest slide since June 2013, while 10-year New Zealand yields dropped to a record 3.01%.

Japan’s 10-year yield has declined from 0.22% on January 28, the day before the central bank unexpectedly announced it would lower rates on excess reserves to minus 0.1%.

About 29% of the outstanding debt in the Bloomberg Global Sovereign Bond index was yielding less than zero as of 17:00 in New York on Monday. Swiss 3% 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 05:49, 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 06:51,Australia & New Zealand Banking Group prices showed. The index last closed higher in September 2012, CMA data indicate.

Currencies

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 1 percent to 114.70 recently. Global currency volatility rose to 11.63%, according to a JPMorgan gauge.

The Australian and New Zealand dollars each dropped at least 0.4%, while the euro advanced 0.1% to $1.1207.

The rand depreciated 0.7% to 16.237 per dollar.

Commodities

Gold rose for an eighth day, gaining 0.2% 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 1.6% for a second day of gains. Aluminum gained 0.7%.

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 0.6% to $29.86 a barrel.

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