Australia, Japan sell-off amid global rout; Nikkei drops 5.4%

Kazuhiro Nogi | AFP | Getty Images

Australian and Japanese markets closed sharply lower on Tuesday, after another sell-off in U.S. and European stocks overnight as many Asian markets remained shut for the Lunar New Year.

China and Taiwan are closed for the week, while markets in Hong Kong, Singapore, South Korea, Malaysia and Vietnam are closed today.

The Nikkei 225 tumbled, closing down 918.86 points, or 5.40 percent, at 16,085.44, falling for five of the past six sessions.

The dollar-yen pair was down 0.97 percent at 114.73, tapping its lowest level since November 2014. Japan's Finance Minister Taro Aso said on Tuesday that the yen's moves were "rough," adding that he'd be watching it closely, Reuters reported.

The 10-year Japan government bond yield (JGB) fell below zero for the first time, likely weighed by safe haven flows. Bond prices move inversely to yields.

Exporters Toyota, Nissan, Honda and Sony closed down between 6.12 and 7.21 percent; a stronger yen is a negative for exporters as it reduces their overseas revenue when converted the into local currency.

Down Under, the ASX 200 slid 143.29 points, or 2.88 percent, to close at 4,832.10, weighed by sharp drops in the energy, materials and financials sectors, which were down between 1.10 and 4.11 percent.

Chris Weston, chief market strategist at spreadbetter IG, had sounded an ominous note is his morning epistle, noting that traders off work to celebrate the Lunar New Year would be happy their markets were closed.

"For those who have traded the overnight move, it almost feels like something big is brewing, similar to 24 August and the quasi-flash crash capitulation move we saw," Weston wrote.

"These markets need a strong shake up and sharp downside move, followed by a wave of buying to settle things down. But until that comes there will be no clarity, absolutely no confidence and a bucket load of concern," he added. "There's concern the volatility will feed through into real economics and central banks will be pretty much powerless to stop it."

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Oil prices continued their volatile run, dropping overnight after a meeting between Saudi Arabia and Venezuela at the weekend ended with few signs of coordination to tackle the global supply glut.

During Asian hours, U.S. crude futures were up 0.94 percent at $29.97 a barrel, after falling 3.88 percent in overnight trade. The global benchmark Brent was flat at $32.88 a barrel, following a 2.85 percent decline during U.S. trading hours.

Energy plays were mostly down, with shares of Santos falling 4.97 percent, Woodside Petroleum down 2.48 percent, Inpex seeing losses of 6.35 percent and Japan Petroleum lower by 5.71 percent.

Spot gold also traded flat at $1,191.40 an ounce during Asian hours. Overnight, gold futures for April delivery surged 3.47 percent to close at $1,197.90 an ounce, after breaking above $1,200 for the first time since June. The precious metal, considered a safe-haven investment during times of market turmoil, also recorded its best trading day since December 2014.

Shares of gold miners rose, with Newcrest finishing up 8.25 percent, Alacer Gold adding 6.30 percent, Evolution Mining up 6.41 percent and Kingsgate surging 16 percent.

Banking stocks in Australia and Japan fell, following a tumble by their counterparts in Europe and the U.S.

Weston said in a separate note that the long-felt pain in the energy sector had morphed into a banking crisis.

"Much has been made of the demand for credit default swaps (CDS) protecting against future default in the European banking space," he wrote. "Rightly so, when Deutsche Bank has been sold off 58 [percent] from its 2015 high and left with a market capitalization of 21 billion euros. Given they have 54 billion euros in bonds maturing over the next two years (much of this in the next two months) and much of their existing funds tied up as regularity capital, things don't look hugely sustainable."

He added that price action in Asia had reflected these concerns, with "Aussie banks getting smashed, despite not having anywhere near the same balance sheet duress as European banks."

Australia's so-called Big Four banks, ANZ, Commonwealth Bank of Australia, Westpac and NAB, closed down between 3.96 and 4.78 percent.

Japanese banking stocks were also down as concerns persisted over their profitability after the central bank introduced a negative interest rate policy on January 29. Shares of Mitsubishi UFJ were down 8.73 percent, SMFG fell 8.97 percent and Mizuho Financial slipped 6.22 percent.

The official summary of the central bank's meeting, released Monday, showed the Bank of Japan's members tussled over the decision to adopt negative interest rates, raising concerns about banks' profitability and that other countries' policymakers would also cut rates.

"I am concerned that the Bank's introduction of a negative interest rate could lead to a competition with central banks in other countries, which already have adopted negative interest rates, to lower interest rates deeper into negative territory," one member said, according to the summary of opinions at the monetary policy meeting.

Takuji Okubo, managing director and chief economist at Japan Macro Advisors reckoned the Bank of Japan's negative interest rate move was an attempt to anticipate and preempt a change in market sentiment.

"There are people who say the BOJ created too much uncertainty. I don't think that's it," he said, attributing the current market volatility to negative news on China and emerging markets as well as market expectations that the U.S. Federal Reserve may give up on hiking rates.

"They think that once they do that, the yen will appreciate and the BOJ has to do something, (such as) to cut the policy rate further," Okubo added.

Overnight, Goldman Sachs was one of the top losers on the Dow Jones industrial average, falling 4.61 percent.

In Europe, banking stocks also declined, with Italy's UniCredit down 6 percent and Banca Monte dei Paschi di Siena slumping some 12 percent after receiving a cut to its stock price target from J.P. Morgan. In the U.K., shares of HSBC were down 4 percent and Barclays temporarily suspended trading Monday due to outsize moves before eventually closing 5.3 percent lower.

Elsewhere, analysts are also concerned that banks will face a tough earnings environment.

In the U.S., Citigroup lowered its earnings forecasts for U.S. banks, citing in part its expectations the Federal Reserve was unlikely to raise rates this year because financial conditions were already tightening. Citi said it now assumed the Fed funds rate would normalize at around only 1.5 percent, a level that would weigh on net interest margins for U.S. banks.

"If this view of flat rates materializes, it will be a very tough environment for spread lenders," Citi said in a note on Monday. "We see low single digit net interest revenue growth over the next couple years as the net interest margin will likely step down as longer duration books reprice."

Major U.S. indexes closed more than 1 percent lower; the Dow Jones industrial average fell 177.92 points, or 1.1 percent, to 16,027.05. The S&P 500 closed 26.61 points, or 1.42 percent, lower at 1,853.44 and the Nasdaq composite slid 79.39 points, or 1.82 percent, to close at 4,283.75.

In Europe, the pan-European Stoxx 600 was down 3.5 percent and the German DAX closed 3.3 percent lower Monday, with banks and automobile stocks selling off on fears the European Central Bank may cut interest rates further into negative territory, following in the footsteps of the Bank of Japan, which surprised markets at the end of January by setting the country's first negative interest rates.

— CNBC's Leslie Shaffer and Jenny Cosgrave contributed to this report.

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