Tokyo: Asian shares and commodities slid while the euro fell to its lowest in almost two years against the dollar on Thursday, as surging borrowing costs in troubled Spain raised fears that it could fail to rescue its banks and may need to seek a bailout.
Investors fled from risk assets to US government bonds, with the benchmark 10-year Treasury yield falling below 1.6% in early Asian trade on Thursday, its lowest in at least 60 years. The 10-year Japanese government bond yield hit a nine-year low of 0.810%.
The dollar and the yen were also beneficiaries of escalating risk aversion although gold, a traditional safe-haven asset, struggled in the face of the greenback’s strength.
MSCI’s broadest index of Asia-Pacific shares outside Japan tumbled as much as 1.6%, and was set for its worst month in eight months with a drop of nearly 12%. The pan-Asia index was down 0.3% for the year.
The index was dragged down as some key Asian bourses - Hong Kong, Australia and Korea - temporarily fell to negative territory for the year.
Japan’s Nikkei was down 1.4% on the day and on track for its biggest monthly drop in two years.
European shares were likely to tread lower, with spreadbetters predicting major European markets would open down as much as 0.2%. US stock futures were nearly unchanged.
“The situation in Spain at the moment is untenable, not only is there concern over the state of its banking sector but there is little confidence its government will actually be able to bail them out,” said Michael Creed, an economist at the National Australia Bank.
A caution by Spain’s central banker that Madrid will miss deficit targets for this year pushed Spanish 10-year yields above 6.7%, close to 7%, a level seen as unsustainable and which could push Spain to seek a bailout just as Greece, Portugal and Ireland have done.
The cost of insuring against a Spanish default scaled a record high near 600 basis points while Italy, which is also struggling with huge public debt, saw its 10-year yield top 6 percent for the first time since January.
Yields on all German bond maturities hit record lows on Wednesday, pushing the premium investors demand to hold Spanish debt over German debt to its highest since the launch of the euro at around 543 basis points.
Firm Dollar Slams Commodities
Oil prices extended losses and copper hit 2012 lows near $7,422 a tonne on Thursday.
US crude futures eased 0.3% at $87.59 a barrel and were set for their worst month since late 2008.
Brent crude fell 0.3% at $103.15 a barrel, on track for its worst month in two years.
“Investors were already exposed to the problems in Spain, but what really disturbed the market were oil prices and US bond yields which broke out of range to hit long-period lows,” said Lee Seung-wook, an analyst at Kiwoom Securities.
The dollar index, measured against a basket of major currencies, extended its rally to 83.11, its highest since September 2010.
The strong dollar and intensifying risk aversion sent the Thomson Reuters-Jefferies CRB index, a global benchmark for commodities, tumbling 1.7% to its lowest levels since September 2010 on Wednesday. A stronger dollar typically weighs on dollar-based commodities.
The dollar index was on the verge of closing above its 100-month moving average at 81.82, which would generate a buy signal which in turn could spur a sustained period of dollar strength for the next couple of years to as high as 101.00-106.00, some analysts said.
The index has in the past 30 years generated four successful buy signals which have resulted in significant dollar moves, they added.
Euro Under Fire
The euro fell to a 23-month low of $1.2358 and a 4-1/2 month low against the safe-haven yen at 97.36.
“There is no exit in sight currently for the euro to get out of this downtrend because there is no shortage of negative news,” said Hisamitsu Hara, chief FX manager at Bank of Tokyo-Mitsubishi UFJ.
“Problems in Spain, a large euro zone economy, heighten fears while the risk of Greece leaving the euro bloc raises contagion concerns. The euro remains depressed, with players cautiously testing the downside”.
Hara added that the euro could weaken until support at the$1.19 level. The euro last dipped below $1.19 in June 2010.
The yen rose to a 3-1/2 month high against the dollar at 78.71.
Hara said wariness over Japanese authorities intervening to prop up the dollar was likely to prevent the US currency from falling sharply further.
The European Commission threw Spain two potential lifelines, offering more time to reduce its budget deficit and offering direct aid from a euro-zone rescue fund to recapitalize distressed banks.
But any relief from the news was quickly offset by the latest Greece polls showing parties for and against a bailout neck-and-neck or very close to each another, ahead of a 17 June election that may decide whether Greece remains in the euro.
Asian credit markets weakened, with the spread on the iTraxx Asia ex-Japan investment-grade index widening by 8 basis points.