Asian shares fell and U.S. Treasury yields dropped to the lowest levels in at least 60 years Tuesday on fears that Europe's sovereign debt troubles are worsening and could trigger a second full-blown banking crisis.
The market jitters pushed the euro lower and European stocks appear set to slide further as S&P 500 futures slid 2.7 percent, pointing to sharp losses on Wall Street as it catches up to European and Asian markets after a holiday on Monday.
Euro STOXX 50 futures fell 1.3 percent and German and French index futures also dropped, while spreadbetters called the FTSE 100 1 percent lower. European stocks tumbled 4 percent on Monday, with financial shares falling to their lowest in more than two years.
It's the European disease that is infecting markets all around the world at the moment, Michael Heffernan, senior client adviser and strategist at Austock Group in Australia, told Reuters.
Adding to the gloom are worries that the United States may be sliding back into recession, a concern heightened by a slew of downbeat data, most recently employment figures that showed the world's top economy failed to create any jobs last month.
Singapore's finance minister told a conference in the city-state uesday that a global recession was now more likely than not as the U.S. and European economies were at stall speed.
Gold, traditionally seen as a safe asset in times of uncertainty, rose above $1,919 an ounce to a new record, while the yield on 10-year Japanese government bonds, another safe haven, fell below 1 percent.
U.S. Treasuries rose sharply in Asian trading, with the yield on 10-year notes falling as far as 1.91 percent before stepping back to 1.94 percent, still below 1.99 percent late on Friday.
Tokyo's Nikkei fell 2.2 percent to a six-month low, while MSCI's broadest measure of Asia Pacific shares outside Japan was off 1.7 percent, putting the index nearly 19 percent down from its April high.
The hardest hit sectors in the MSCI index were industrials, materials and financials.
The latest focus of Europe's slow-motion debt crisis is Italy, whose bonds were sold off on Monday on worries that Rome is not doing enough to bring its debt under control. Italian 10-year yields rose near 5.6 percent, their highest since early August.
While European leaders have been able to put together bailout packages for Greece, Ireland and Portugal, investors fear the consequences of a similar crisis engulfing a bigger economy such as Italy or Spain.
The chief executive of Deutsche Bank said on Monday that the euro zone sovereign debt crisis would stunt bank profits for years and could cause the collapse of weaker lenders.
The euro fell to a seven-week low below $1.4055. Against the yen, the single currency fell as far as 107.95, its lowest since March.
The European Central Bank, the only major Western central bank to raise interest rates since the 2008/09 financial crisis, meets on Thursday but is expected to leave borrowing costs unchanged at 1.5 percent, which could put the single currency under further pressure.
Without the support of a more hawkish central bank, the euro will look very vulnerable, Societe Generale strategists Kit Juckes and Sebastien Galy wrote in a note.
The worsening outlook has piled pressure on the U.S. Federal Reserve to embark on a third round of money creation via bond purchases, known as quantitative easing, which could cheapen the dollar and encourage buying of riskier assets.
The next significant data from the United States is the U.S. ISM non-manufacturing index for August, due later on Tuesday.
If we get a negative reading, it will just reinforce concerns about a global recession and possibility of some form of stimulus from the Fed down the road, said Ong Yi Ling, an analyst at Phillip Futures.
Global growth in the services sector came to a virtual standstill last month as new business all but dried up, several surveys showed on Monday.
Hopes of further stimulus from the Fed or President Barack Obama -- who addresses Congress on his economic plans on Thursday -- helped Brent crude oil steady after sliding more than $2 a barrel on Monday on fears renewed recession would hit demand.
Brent was flat just above $110 a barrel. U.S. crude was trading at $83.30 a barrel, down more than $3 from Friday's close, as there was no settlement on Monday due to the holiday.
JGBs were in demand as investors retreated from riskier assets, with September 10-year futures up 0.24 point at 143.03, a 10-month high, while the benchmark 10-year yield fell 2 basis points to 0.990 percent.
(Additional reporting by Amy Pyett in Sydney and Rujun Shen and Frances Kan in Singapore; Editing by Kim Coghill and Ramya Venugopal)