Pedestrians in Tokyo pass a share prices board and a board showing the foreign exchange rate against the US dollar.
Photograph by Kazuhiro Nogi—AFP/Getty Images
By Geoffrey Smith
January 6, 2015

Oil prices continued their downward spiral Tuesday, with the benchmark price of crude trading below $49 a barrel for the first time since early 2009 on the back of data showing that global supply is still racing ahead of demand.

With markets focusing on the weakness of demand, stocks fell in both Asia and Europe, while “safe-haven” investments such as U.S. Treasury bonds and gold surged again.

The yield on the 10-year Treasury fell below 2% for the first time since May 2013 in early trading in Europe, while gold rose to a three-week high of $1.213.60 a troy ounce, as investors once again shunned anything that smelled remotely of risk. For the first time ever, the average 10-year bond yields of the “G3”–the U.S., Japan and Germany–are now trading below 1%.

Among global stocks, Japan’s Nikkei index, which had already closed by the time the U.S. market started its descent Monday, was among the worst performers, falling 3%. Middle eastern bourses such as Dubai and Kuwait–heavily dependent on recycled oil money–also tumbled.

The rout in oil had moderated by late morning in Europe, with crude recovering from an earlier low of $48.51/bbl to $49.10. But its impact was evident in another sharp fall in the Russian ruble. By late-morning in London, the dollar was 3.7% higher against it at 63.12, although the move was exaggerated by the fact that neither the Russian central bank nor big Russian corporates, which have been instructed to provide dollar liquidity to the local market were in the market due to the Orthodox Christmas holiday.

Scarcely a buyer in sight as crude plumbs new depths

European stocks, which had followed much of Wall St’s rout on Monday, had less dramatic falls Tuesday, but failed to stabilize with any conviction after data showing service sector activity across the Eurozone and U.K. was weaker than originally thought in December.

Research firm Markit’s Purchasing Manager Surveys showed that the Eurozone grew at its slowest rate in over a year in the fourth quarter, while the U.K.’s all-important services sector grew at its slowest pace in 19 months in December. The euro hit a new 9-year low of $1.1894 against the dollar in response.

Markets refused to take comfort from a more upbeat assessment of China’s services sector, or from an unconfirmed Bloomberg report that Beijing will speed up $1 trillion of infrastructure projects in order to sustain growth.

The Eurozone is coming to terms with the return of crisis conditions to Greece, as new elections on Jan. 25 approach. Both German Chancellor Angela Merkel (reportedly) and Francois Hollande have suggested in recent days that the Eurozone can now afford to let Greece leave the Eurozone if it abandons its economic reforms. The yield on Greece’s three-year bond, which has surged from 4% to 13.5% since October, is now reflecting serious expectations that the country may end up outside of the Eurozone and unable to repay its euro-denominated debts.

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