Investors flock to safe haven trades as sell-off deepens

Fears surrounding the credibility of central bank policy sparked another sharp sell-off in risk assets on Thursday, forcing investors to rush into traditional safe-haven assets such as government bonds, gold and the Japanese Yen.

European stocks plunged with the pan-European STOXX 600 ending the session down around 3.5 percent. London's FTSE 100 closed provisionally down 2.2 percent, while the French CAC and the German DAX ended down 2.6 percent and 3.8 percent respectively.

519466061CC002_Markets_Stab
Carl Court | Getty Images

Banking stocks got pummeled again on Thursday, with shares in French lender Societe Generale tanking as much as 15 percent after its fourth-quarter net profit fell short of analyst forecasts.

Deutsche Bank, which has been one focus for investor worries in recent days, fell as much as 9.5 percent, after bouncing in Wednesday's trade. Credit Suisse and Italian banks, including Unicredit, ended around 7 percent down or lower.

"I think it is pure emotion, fear has overwhelmed and I think the strategy is basically cut now, explain later," the head of the U.K. Investment Office at UBS, Bill O'Neill told CNBC.

"We are in an environment of very limited nominal growth. Our sense is that the market is still not comfortable with normalizing interest rates, alongside the conviction that growth will prove to be sustainable. There is a sense in the market, that you can have one but not the other," he said.

The risk-off sentiment saw heightened demand for safe-haven Treasurys, with the U.S. 10-year government bond yield falling through 1.55 percent, for the first time since September 2012.

U.S. stocks fell sharply as investors awoke to a massive global selloff.

Gold, which is seen as an inflation hedge and a defensive asset in times of economic stress, surged to its highest level in over eight months, following speculation that the Federal Reserve could find it tough to raise interest rates further this year. Spot gold gained nearly 5 percent to trade around $1,256 per troy ounce.

Dollar weakness also helped support the yellow metal, as the Japanese yen jumped 2 percent to its strongest in 15 months, touching 110.99 yen against the greenback on Thursday.

"This is where I get very worried, if we are saying it (dollar-yen) is a safe haven trade. The move in the dollar, to me is beginning to inform me that perhaps the U.S. market is pricing in a much worse outcome for the U.S. economy now, than it was 3 weeks," said senior independent client adviser at Nomura, Bob Janjuah.

Sweden's Riksbank shocks with rate cut

The Swedish central bank added to worries about central banks' ability to address slowing growth, after it slashed rates further into negative territory in a shock move which confused markets and sent European government bond yields to fresh record lows.

The Swedish crown fell sharply against the euro, falling to its lowest level since August last year and short-term bond yields sank to record lows.

The Riksbank cut its main repo rate to -0.5 percent, which was deeper than expected and maintained a negative stance, adding that it was willing to do even more easing if inflation remained stubbornly below target.

"We think that the Riksbank is still likely to need to take further action. There is little sign that inflation will pick up any time soon while surveys of business and consumer inflation expectations are not reassuring. What's more, with other central banks – most notably the ECB – likely to loosen monetary policy further in the coming months, we doubt that the recent falls in the crown will be sustained," said European economist at Capital Economics, Jessica Hinds.

U.K. gilt yields hit a fresh record low of 1.292 percent and yields on French and Dutch 10-year government bonds fell to their lowest levels in 9 months.

The sharp moves in markets follow Federal Reserve Chair Janet Yellen's testimony before Congress on Wednesday and Thursday.

In her semi-annual congressional testimony, Yellen said that the Federal Open Market Committee (FOMC) had not fully researched the legality around negative interest rates, amid whispers that the central bank could enact such a policy. But Yellen did admit that weakness in the global economy and risks from China could weigh on the outlook for U.S. growth.

"These developments if they prove persistent, could weigh on the outlook for economic activity and the labor market," Yellen said in her remarks.