* Banks remain under scrutiny
* Yields on 10Y Japanese bonds fall below zero
* Copper and oil turn lower, safe-haven gold in demand
* Yen rises versus dollar and euro
By Alistair Smout
LONDON, Feb 9 (Reuters) - A drop in bank shares kept
European shares under pressure on Tuesday, after losses in Asian
markets sent investors scurrying for safe havens.
Turmoil in Asia set the tone for the session, as 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 highest
since June.
After a choppy morning, the pan-European FTSEurofirst 300
.FTEU3 turned lower, dropping 1.8 percent. It touched its
lowest levels since October 2014 as it fell for a seventh
straight day.
The STOXX Europe 600 bank sub-index .SX7P fell 3.4
percent, leaving it down around 9 percent so far this week.
Shares in several Italian banks were suspended from trading
after dropping sharply
The euro zone bank index .SX7E was down for its seventh
straight week, set for its longest weekly losing streak since
1998.
Other growth-sensitive sectors, such as basic resources
.SXPP , also came under pressure, as copper CMCU3 fell 2
percent.
In all, world stocks .WORLD fell 0.9 percent, and S&P 500
e-mini futures ESc1 were also down 0.9 percent.
Many investors believed that signs of stress in the market
for credit default swaps pointed to further declines ahead.
"There is a high probability of a further correction in
equity prices, led by banking and energy stocks. There could be
a wave of defaults in the energy sector and that will damage the
balance sheet of the banking sector," said Lorne Baring,
managing director of B Capital Wealth Management. Slowing global
growth was clouding the outlook further, he added.
"We are advising our investors to drastically reduce risk
and build protection."
Deutsche Bank DBKGn.DE turned negative and was down 1.2
percent, extending Monday's 9.5 percent slide. Late Monday, the
German bank said it has "sufficient" reserves to make payments
due this year on AT1 securities, after concern had mounted about
its ability to maintain bond payments
Strategists at Goldman Sachs (N:GS) said banks had enough liquidity
and that recent capital hikes should reduce the risk of a
financial crisis re-run.
Asian shares also slid on Tuesday. Japanese Finance Minister
Taro Aso warned the yen's rise was "rough", something of an
understatement as the Nikkei .N225 nosedived 5.4 percent.
MSCI's broadest index of Asia-Pacific shares outside Japan
.MIAPJ0000PUS fell 1.2 percent. Australian shares hit a 2
1/2-year closing low and would have been lower if not for
holidays in many centres.
Traders said that the recent market turmoil raised the
stakes for U.S. Federal Reserve Chair Janet Yellen when she
gives her semi-annual testimony before Congress this week.
"She needs to come across as optimistic without being too
hawkish and cautious without being negative," said Jo Masters, a
senior economist at ANZ. "Hawkishness or dovishness could
easily exacerbate the current sell-off, tightening financial
conditions further."
U.S. crude oil fell back below $30 a barrel, having risen
over 2 percent in earlier trade.
With copper down, gold benefited from the risk-off sentiment
and reached a seven-month high.
MURMURS OF RECESSION
The Bank of Japan's recent shift to negative rates has
raised concern that exotic monetary policy is reaching the point
of diminishing returns. But talk about a possible recession in
the United States has also led to speculation the Federal
Reserve will have to slow or suspend plans to normalise rates.
"Investors continue to question the outlook for the world's
largest economy, the US. We are with the consensus in seeing no
imminent threat of a US recession," David Stubbs, Global Market
Strategist, JP Morgan Asset Management, said in a note.
Diminishing expectation U.S. rates will rise have pulled
10-year Treasury yields to their lowest since early 2015 and
weakened the U.S. dollar, which touched a six-week trough
against the Swiss franc CHF= . The euro hit a two-week low
against the franc.
Against a basket of currencies, the dollar was flat at
96.525 .DXY .
While the euro was edged up against the dollar, bets on
volatility ahead for euro-dollar exchange rates surged to a
two-month high of 11 percent, as traders bet more on the dollar.
That flipped most derivatives pricing in favour of a weaker euro
over the next few months
By the far the biggest mover was the yen, long considered a
safe haven given Japan's position as the world's top creditor
nation. The dollar dived as low as 114.22 yen JPY= from above
121 a week ago. The euro fell as much as one percent to 128.24
yen EURJPY= .
The yield on Japan's benchmark 10-year government bond
JP10YTN=JBTC touched minus 0.010 percent as the Nikkei stock
index tumbled. It was the first time a G7 nation's 10-year
government bond yield reached minus numbers, although yields on
German bunds have come close.
Southern European bond yields pulled back from multi-month
highs on Tuesday, showing some signs of stabilization a day
after concerns about global growth and the health of Europe's
banks triggered heavy selling.
Such concerns have also seen one market measure of long-term
euro zone inflation expectations fall to a record low