SYDNEY (REUTERS) - Asian share markets were scorched on Tuesday as stability concerns put a torch to European bank stocks and sent investors stampeding to only the safest of safe-haven assets.
As fear overwhelmed greed, yields on longer-term Japanese bonds fell below zero for the first time, the yen surged to a 15-month peak and gold reached its most precious since June.
Japanese Finance Minister Taro Aso felt moved enough to warn the yen's rise was "rough", something of an understatement as the Nikkei nosedived 5.4 per cent.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.2 percent, with Australian shares hitting 2-1/2-year closing low, and would have been lower if not for holidays in many centres.
Spread-betters see another weak session in European shares, where German DAX is seen falling 0.7 per cent and Britain's FTSE 0.5 per cent.
S&P 500 e-mini futures fell more than 1 per cent at one point.
"Sentiment towards risk assets remained extremely bearish and price action reflected a market that may be capitulating,"said Jo Masters, a senior economist at ANZ.
All of which magnified the stakes for US Federal Reserve Chair Janet Yellen's testimony this week. "She needs to come across as optimistic without being too hawkish and cautious without being negative," said Mr Masters."Hawkishness or dovishness could easily exacerbate the current sell-off, tightening financial conditions further."
Wall Street pared losses but still ended deep in the red. The Dow lost 1.1 per cent, while the S&P 500 fell 1.42 per cent and the Nasdaq 1.82 per cent.
The rout began in Europe on Monday, when the FTSEurofirst 300 index shed 3.4 per cent to its lowest since late 2013, led by a near 6 per cent dive in the banking sector .
Deutsche Bank alone sank 9.5 per cent as concerns mounted about its ability to maintain bond payments. Late Monday, the German bank said it has "sufficient" reserves to make due payments this year on AT1 securities.
The cost of insuring bank debt against default also climbed to its highest since late 2013. Borrowing costs in Spain, Portugal and Italy jumped as investors demanded a fatter risk premium over safer German paper, where two-year yields hit record lows at minus 52 basis points.