The euro hit its lowest level in over two years and world shares fell sharply on Monday after reports that Spain's indebted regions needed help fueled fears that the country will become the fourth euro zone member to ask for a major bailout.
U.S. stocks were poised to join the selloff with futures prices indicating a much lower open on Wall Street. .N
Spanish media reported that up to six regions may seek aid from the central government after Valencia asked for funds on Friday, sending yields on all Spanish government bonds sharply higher and 10-year debt to a euro-era high of over 7.5 percent.
Given the market reaction on the back of the news that more and more regions are looking to tap in to the liquidity fund..., it will be very difficult for Spain to circumvent further support for itself, said Norbert Aul, a rate strategist at RBC Capital Markets.
Spain must make coupon and redemption payments to bondholders totaling 20 billion euros ($24.3 billion) next Monday, followed by nearly 25 billion euros in October, according to Reuters data.
Economy Minister Luis de Guindos, who visits Berlin on Tuesday for talks with German Finance Minister Wolfgang Schauble, has insisted Spain does not need a full sovereign bailout such as the ones taken by Greece, Ireland and Portugal to stay afloat.
Spain reached a deal with its euro zone partners for a bank bailout worth up to 100 billion euros and is implementing a series of austerity measures but the shrinking domestic economy is piling up problems for Madrid and unnerving investors.
The Bank of Spain said on Monday the economy had sunk deeper into recession in the second quarter, contracting at an annualized rate of 1 percent.
GREEK DRAMA TO RESUME
Concerns over Greece's future within the euro zone have also resurfaced ahead of the visit to Athens by a group of international lenders on Tuesday. They must decide if the government has done enough to qualify for further rescue payments and avoid a chaotic default.
The combination of worries about Spain and Greece sparked a broad slide in the euro, which was already weakened by European Central Bank rate cuts earlier this month.
The single currency fell 0.6 percent to $1.2082, its lowest level since June 2010.
What began as a Spanish banking bailout looks to be moving rather quickly towards a possible sovereign bailout. Overlay that with increasingly negative news on Greece and you get a fairly negative mix, so the path of least resistance for the euro is down, said Jeremy Stretch, currency strategist at CIBC.
Data from the Commodity Futures Trading Commission released on Friday showed that currency speculators are increasing their bets in favor of the U.S. dollar as the euro zone debt crisis and its impact on global growth deepens.
The ongoing negative developments in Europe support our view that the defensive currencies of the yen and the U.S. dollar will remain firm in the near-term amidst euro weakness, said Lee Hardman, currency analyst at the Bank of Tokyo-Mitsubishi UFJ.
The steady trend away from riskier assets has pushed safe-haven bond prices higher and yields lower across the board.
Ten-year U.S. Treasury note yields hit a record low of 1.4246 percent in Asia on Monday, while Japanese government bond yields fell to their lowest level since 2003 and German 10-year Bunds fell to a record low.
ITALY IN FOCUS
Italian 10-year government bond yields shot past their Irish counterparts for the first time since January 2009, gaining 16 basis points to 6.37 percent, as investors worried Italy could be the next country to run into trouble.
In equity markets investors fled banking stocks, which are most exposed to the debt crisis, sending the FTSE Eurofirst 300 index .FTEU3 of top European shares down 1.9 percent to 1028.12 points, after it lost 1.5 percent on Friday.
Spain's main share index, the Ibex .IBEX was down 4 percent and Milan's FTSE MIB .FTMIB shed 4.4 percent to its lowest euro-era level
Euro zone bank stocks .SX7E were also hit hard and fell 5.3 percent to an all time-low while the Euro STOXX 50 implied volatility index, which uses options to gauge expectations of future share price swings, rose by over 20 percent. .V2TX
After posting its worst day of the month on Friday, the MSCI world equity index .MIWD00000PUS fell a further one percent on Monday to a 10-day low of 291.15 points.
Europe's financial problems and their potential to stifle global growth triggered a widespread selloff in commodity markets, sending oil down nearly $3 a barrel.
Brent crude was down $2.98 at $103.85 a barrel after touching an intra-day low of $102.95. U.S. crude fell $2.73 to $89.10 a barrel. $2.98 at $103.85 a barrel
When you've got fear in the markets, risk assets get sold off, said Michael Hewson, an analyst at CMC Markets.
Copper hit a three-week low on the London Metal Exchange of $7,367.75 a metric ton, nickel sank to a three-year low and tin hit its lowest since last September.
Corn and soybean prices also eased back from the record highs reached at the end of last week.
Spot gold lost one percent to trade at $1,568.04 an ounce despite its role as a safe haven, as the stronger dollar made the precious metal less attractive.
The dollar has climbed more than 4 percent against a basket of currencies so far this year .DXY, weighing on gold that has risen about 1 percent during the same period.
In euro terms, gold is trading near six-month highs, so it's not as bad as it first looks. It's more about dollar strength than gold weakness, said Commerzbank analyst Eugen Weinberg.
The lack of commitment to further monetary stimulus from the U.S. Federal Reserve has left gold trapped in an increasingly narrow range, as investors await clarification from the next Fed policy meeting at the end of the month.