U.S. bond prices rose and Germany sold debt with a negative yield for the first time on Wednesday as investors uneasy about a bleak economic outlook from the Federal Reserve and the intractable euro zone crisis turned to safe haven assets.
The demand for safety pushed the dollar .DXY up 0.2 percent against a basket of currencies to 83.22, nearing last week's two-year high of 83.829, and set the stage for a weaker open on Wall Street. .N
The mood of investors was clearly in evidence at a German auction of 4.2 billion euros ($5.1 billion) of new two-year government bonds, which attracted bids worth twice the amount offered and sold at an average yield of -0.6 percent.
The outcome means investors are so worried about the European debt crisis and the impact it is having on the economic outlook they are prepared to pay a premium to the German government to park their cash in its two-year paper.
It highlights investor nervousness about what's going on in the euro zone and the outlook for the euro itself. There's just a flight really to quality, said ICAP economist Don Smith.
The single currency fell 0.5 percent to $1.2250 $1.2278, against the dollar, well below Tuesday's one-week high of $1.2317, but off a two-year low of $1.2162 hit last week.
The euro was also hit when traders reacted to media reports citing German Chancellor Angela Merkel as saying she cannot be sure the European project will work.
We have not yet shaped the European project so that we can be sure that everything will turn out well, we still have work to do. I am optimistic that we will succeed, Merkel said via her party's website.
Markets were already in a nervous mood after Fed Chairman Ben Bernanke said on Tuesday that the U.S. economic recovery was being held back by anxiety over Europe's debt crisis and the path of U.S. fiscal policy, and his unease over the stagnant jobs market.
Bernanke said the central bank was considering a range of tools to help the economy, but went on to reiterate an earlier message from the Fed's last policy meeting that it would wait to see if they would be needed.
Bernanke essentially followed the line from the last Fed meeting, and markets had been expecting a little bit more, said Ian Stannard, head of European FX Strategy at Morgan Stanley. he said.
We think major central banks have been disappointing the markets with a more cautious approach to easing despite signs of growth slowing, and this is going to keep risk assets under pressure, Stannard said.
The U.S. 10-year T-note yield was 2.7 basis points lower on the day at 1.4807 percent after the Fed chairman's comments.
On Monday the 10-year note matched the historic low of 1.4420 percent hit in June, the lowest yield recorded since the 19th century, according to Reuters data.
Meanwhile the strong demand for good quality bonds left the debt of peripheral European nations struggling.
Spanish 10-year yields were up 12 basis points at 6.95 percent, close to the 7 percent widely regarded as an unsustainable rate for a government to fund itself. The equivalent Italian debt was five basis points higher at 6.8 percent, though traders said there was little volume behind the moves.
Oil markets took their cue from Bernanke's gloomy view of the outlook for the world's top oil consumer.
Brent crude slipped 38 cents to $103.62 a barrel and U.S. oil fell 44 cents to $88.77 a barrel.
Bernanke completes his semi-annual Congressional testimony by addressing the House Financial Services Committee starting at 1400 GMT on Wednesday.
While oil traders are awaiting data on crude stockpiles in the United States later in the day from the Energy Information Administration (EIA) to confirm an industry report that said inventories had fallen more than expected.
After a weak session in Asia earlier on Wednesday world shares .MIWD00000PUS were largely unchanged at 310.5 points.
European equity investors turned their attention to the corporate earnings outlook after some forecast-beating results from major U.S. firms raised expectations Europe's reporting season could surprise markets on the upside.
The pan-European FTSEurofirst 300 .FTEU3 index was up 0.2 percent at 1043.35 points, well within a 2.5 percent trading range of the past week.
Only 9 percent of S&P 500 companies have reported second quarter earnings so far but of these 46 firms, 71.7 percent have beaten analysts' expectations, 15.2 percent reported earnings in line and only 13 percent reported earnings below forecasts.
Over the past four quarters, 68 percent of companies beat estimates, 10 percent matched and 23 percent missed estimates, according to Thomson Reuters research.
In Europe the hurdle rate is actually a bit lower than in the U.S. in terms of what we're expecting from earnings, said Will Hobbs, equity strategist at Barclays Wealth.
Europe's probably not that far away from what we expected at the start of the year ... so maybe, just maybe, there's the potential for Europe to actually outperform the U.S. for a little bit, he said.