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Global stocks tumble as investors weigh recession risk

Equity markets around the world were met with extreme bearish sentiment on Monday, as worries about the outlook for global growth and the tactics of the world's big central banks came under renewed scrutiny.

European equities crashed to a 16-month low as banks and automobile stocks fell sharply on fears that the European Central Bank may cut interest rates further into negative territory, following in the footsteps of the Bank of Japan's which surprised markets at the end of January by setting the country's first negative interest rates.

NYSE trader markets stocks
Brendan McDermid | Reuters

U.S. stocks looked set for a punishing session on Monday, with major indices opening over 1 percent lower lower as falling oil prices, U.S. rate increase worries and a weak overseas backdrop weighed on investors.

Dow futures were down in excess of 200 points in pre-market trading, as speculation increased on the U.S. Federal Reserve's timetable for interest rate hikes. This follows major losses on Friday, led by a massive drop in technology stocks as mixed U.S. employment data raised concerns the Federal Reserve may raise rates this year.

The pan-European STOXX 600 tumbled around 2.8 percent in afternoon trading, with German and Italian lenders including Commerzbank and Banca Monte dei Paschi di Siena both down in the region of 7 percent. Fiat Chrylser shares also slipped over 7 percent.

"European bank share prices have been under significant pressure this year, giving back 2015's strong performance. Weak investor sentiment has been accentuated by the Bank of Japan's decision to apply negative interest rates on excess reserves, which follows moves already taken by the European Central Bank, Sweden and Denmark. Concerns are increasing that in a climate of negative Interest rates and prolonged dovish monetary policy banks' profitability will be squeezed," said investment manager at Heartwood Investment Management, Jaisal Pastakia.

Meanwhile, Greek stocks plunged over 7 percent to reach its lowest level since 1991, amid worries that a bailout deal could take even longer than anticipated.

The price of insuring against European corporate bond defaults in Europe also shot higher, with the main collection of indices for credit default swaps, the Markit iTraxx, climbing around 12 basis points.

Global Market Strategist at JPMorgan Asset Management, Michael Bell said the market is now pricing in a 50 percent chance of recession in Europe -- a figure which he feels is overdone.

"I think if you look historically at what has caused deflation, it has been a massive contraction in credit. Whereas, what you are seeing in the euro zone is the demand for credit is picking up and you are seeing overall credit being extended. There is improvement in the credit environment in Europe and indeed in places like the U.S. and China," he told CNBC.

Fears of growth in the U.S. have also weighed on markets, according to analysts, pushing investors into traditional safe haven assets, such as gold and U.S. Treasurys. Gold prices hit a three-month high on Monday, extending their largest weekly gain since July 2013, rising to $1,182.

The yield on the 10-year Treasury notes, which moves inversely to the bond's price, dipped further below 2 percent at 1.804 percent, after closing at 1.848 percent on Friday. This is down from 2.3 percent at the start of the year, as safe-haven buying has continued to weigh on yields.

In commodity markets, crude prices traded down, hovering around $30 per barrel as traders held out little hope a meeting between OPEC producers Saudi Arabia and Venezuela would result in any change in output levels.

Investors will be keen to hear what Federal Reserve Chair Janet Yellen has to say this week as she delivers two days of testimony on the economy before congressional committees Wednesday and Thursday. The Fed chair's testimony comes as markets grow anxious about the health of the economy and the Fed's stated intention to continue hiking rates.

"Fears about U.S. growth have also been driving risk assets lower. Much of the recent weakness in the US has been due to the inventory cycle and, as long as final sales hold up as we expect through the consumer, growth should firm in the current quarter. Nonetheless, the likelihood of the Fed raising rates in March has been considerably diminished," said chief economist at Schroders, Keith Wade.

"Our analysis suggests that some of the gloom about the world economy has been overplayed, particularly as regards the oil price. Have markets then become too bearish? The biggest unknown is what will happen to the Chinese renminbi (CNY) and whether we will see a more significant devaluation. If there is some CNY stability, soothing comments from the Fed and better growth figures in coming months, the backdrop for markets would brighten substantially," he added.