World stocks and the euro fell while gold hit record highs on Monday as disappointment over financial health checks on European banks and escalating U.S. and euro zone debt problems sent investors scrambling for safe haven assets.
Some banking shares took a fresh beating after the stress test results released late on Friday failed to address the potential for a Greek sovereign default [ID:nL6E7IF19G], which many economists expect to happen in some form.
Eight smaller banks failed the test, in line with expectations, while a further 16 were close to failing. All of them may need to take action to shore up their balance sheets.
Investors were also nervous about the lack of progress in U.S. debt negotiations on averting a government default.
In the euro zone, focus was centered on a meeting of the region's leaders later this week that may prove critical in determining the role of private sector creditors in further aid to Greece.
The MSCI world equity index <.MIWD00000PUS> fell 0.4 percent. The benchmark index has risen just 1.5 percent since January. European stocks <.FTEU3> lost 0.8 percent on the day, led by banking stocks <.SX7P>.
Emerging stocks <.MSCIEF> fell 0.7 percent.
Spot gold rose to an all-time peak of $1,599.45 an ounce and was on track for its longest winning run in at least four decades.
The safe-haven Swiss franc hit record highs against the dollar and euro while the single currency fell 0.8 percent to $1.4035.
It seems like a vicious circle with Germany's (Chancellor Angela) Merkel not budging on private sector involvement (in a Greek deal) and the ratings agencies saying private involvement would constitute a selective default, said Tom Levinson, currency analyst at ING.
Merkel called on Sunday for private investors to make a major contribution to bailing out Greece. Officials proposed a range of schemes for the European Financial Stability Facility to finance a buy-back or a swap in which private owners of Greek government bonds would accept cuts in the face value of their holdings.
But clarity about a second bailout of Greece may bring only temporary relief for the euro if investors decide the single currency area's problems have become systemic and require a region-wide solution.
The lack of political response is leaving the market with no other choice but to continue to disintegrate, a bond trader said.
Concerns over the failure of euro zone policymakers to agree on a strategy for tackling the debt crisis put peripheral bonds under more pressure, pushing up their yield premium over German Bunds.
Spanish 10-year government bond yields rose 14 basis points on the day to 6.22 percent, within sight of their highest levels in 14 years reached last week, when contagion from the Greek debt crisis rocked Spain and Italy -- the euro zone's third and fourth largest economies.
The German Bund future was up 64 ticks at 129.63, while the dollar <.DXY> was up 0.55 percent against a basket of major currencies.
With five days remaining before President Barack Obama's Friday deadline for a deal to raise the U.S. debt ceiling, Republicans and Democrats have yet to agree on a plan to cut the nation's deficit and raise its debt limit in time to avoid an unprecedented default.
Risk aversion pushed oil prices lower, with U.S. crude falling 0.4 percent at $96.81 a barrel.
(Additional reporting by Neal Armstrong; Editing by John Stonestreet)