By Marc Jones
Turbulence has torn through global markets as investors sought the safety of Japanese yen, gold and top-rated bonds while dumping US dollars on bets the Federal Reserve could be done with raising interest rates.
Even the absence of Tokyo on Thursday for a holiday could not stop the US dollar from hitting a 15-month low on the yen, and gold finally broke major chart resistance to reach its highest since May as a wave of risk aversion swept through trading floors.
Europe got off to a torrid start, with Britain's FTSE 100 down 2.3 percent, Germany's DAX 2.4 percent lower, France's CAC 40 down 2.8 percent and US futures also pointing to one percent drop for Wall Street later.
Sweden's crown and government bond yields were sent tumbling as its central bank delivered a surprise cut to its already deeply negative interest rates.
Insatiable demand for US Treasuries drove longer-term yields to almost three-year lows and flattened the yield curve in a way that has presaged economic recession in the past.
Benchmark European German Bund yields dropped like a stone and UK yields hit an all-time low too, as riskier Spanish, Italian and Portuguese bonds moved in the opposite direction.
The euro zone's finance ministers are set to meet later with
worries creeping back in about Portugal and Greece's ability to stick to the terms of their bailouts again.
"What this shows is that the risk-off mode has come back very quickly and that the worst may still be to come in these markets," said Rabobank European strategist Emile Cardon.
"What is different to previous times is that the bad news in now coming from everywhere, China, Portugal the US the commodity sector the banking sector. It's like several smaller crises could combine into one big crisis."
The flight from risk told on most Asian shares, with Hong Kong -- a favourite channel for global investors to play China -- diving 4.2 percent as investors there returned from the long Lunar New year holidays. Mainland China markets are closed all week.
MSCI's broadest index of Asia-Pacific shares outside Japan shed 1.4 percent, and South Korea resumed with a 2.9 percent drop.
Wall Street had ended Wednesday mixed after Fed Chair Janet Yellen sounded optimistic on the US economy, but acknowledged risks from market turmoil and a slowdown in China.
Analysts took that to mean a hike in March was unlikely, but further tightening remained possible later in the year.
"Yellen made it clear that while the Fed still expects to continue on its gradual tightening path, policy was not on a pre-set course and would respond appropriately to developments," said Justin Fabo, a senior economist at ANZ.
"The real test may come later, if markets continue to deteriorate and look to central banks to save them. Are policymakers' guns loaded with blanks?"
It seemed some were already preparing for the worst.
Longer-term US debt rallied hard as investors wagered that either the Fed would be unable to tighten at even a gradual pace, or that if it did hike it would only hasten the arrival of recession and deflation.
In a marked turnaround, yields on 10-year Treasuries fell to 1.6330 percent, from a top of 1.773, almost exactly matching the lowest close from May 2013. Futures imply further price gains lie ahead.
As a result, the spread over two-year paper shrank to just 96 basis points, the smallest gap since late 2007 just before the global financial crisis hit.
Likewise, Fed fund futures are pricing in the shallowest of shallow tightening paths. The market implies a rate of 45 basis points for the end of this year, 60 basis points at the end of 2017 and 90 by the close of 2018.
The inexorable decline in US yields continued to drag on the greenback, which reached lows last seen in October against a basket of currencies.
The yen was again lifted by safe-haven flows, as befits Japan's position as the world's largest creditor nation. The US dollar sliced down through Y111.36 to reach depths not delved since October 2014 at Y110.99.
The euro also weakened against its Japanese peer, sliding to a 2-1/2 year low of Y126.06. Against the greenback though, the euro drove to a three-month high of US$1.1355.
The aversion to risk helped lift gold as far as US$1217.00 an ounce, clearing stiff resistance around US$1200.
Oil prices resumed their decline as US crude slid 70 US cents to US$26.77 a barrel, while Brent futures lost 33 US cents to US$30.50.