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[LONDON] Oil prices touched fresh 5-1/2-year lows on Monday, spurring an emerging market selloff and demand for the safe-haven yen while European stocks stabilised after their weakest week since 2011.
Indonesia's rupiah sank to a 16-year trough and Russia's rouble, weighed down additionally by concern about fresh US sanctions against Moscow, hit record lows. Emerging stocks fell to nine-month lows and developing market dollar bond yield premiums over US Treasuries were at their highest since 2011.
This spike in year-end volatility, which drove the CBOE Volatility index on Friday to its highest level since the global markets storm of October, is putting high risk bets under pressure everywhere. This stress is not only obvious in emerging markets but also in US junk bonds, where almost a fifth of outstanding bonds are from energy-related companies.
US stock index futures pointed to a recovery on Wall Street, after posting their biggest weekly fall in 2-1/2-years last week, but investors remained edgy before this week's US Federal Reserve meeting where it is expected to hint it is getting closer to raising interest rates.
US crude futures fell more than 2.5 per cent at one point to as low as US$56.25 per barrel before returning to positive territory. They were last up 1.0 per cent at US$58.40 but have fallen more than 40 per cent this year. Brent fell as low as US$60.28 before recovering to trade 1.5 per cent up at US$62.75 a barrel.
"Whilst the commodity has rallied somewhat this morning ... oil has found it notoriously difficult recently to hang onto any gains," said Spreadex financial analyst Connor Campbell.
"This brief moment of positivity is no signifier of renewed health in the black stuff." As Brent prices edged off their lows, the pan-European FTSEurofirst 300 index rose 0.3 per cent to 1,323.19 points.
In Asia, Japan's Nikkei share average fell 1.6 per cent, drawing little momentum from Japanese Prime Minister Shinzo Abe's big election victory on Sunday, which was a boost for his reflationary economic policies.
The volatility in global risk assets is supporting demand for traditional safe havens such as the yen, which rose as markets shrugged off Abe's election victory.
The dollar briefly fell to as low as 117.78 yen before recovering to 118.76 yen, still far from the seven-year high of 121.86 yen set one week ago.
The euro remained on the defensive as euro zone inflation expectations hit a new low on Friday, raising prospects of more aggressive European Central Bank policy easing.
The shared currency was down 0.2 per cent against both the yen and the dollar. Improving US economic data has added to bets that the Fed is moving closer to raising interest rates next year, accentuating the divergence in monetary policy between the Fed and the ECB.
Many investors believe the Fed may change its promise to keep interest rates near zero for a "considerable time" at its two-day policy meeting starting Tuesday.
That risk is weighing on higher-yielding assets, which had attracted capital escaping low US interest rates. Junk bonds were also feeling the pain with the US high yield bond index falling to 10-month lows.
"There's a focus on the Fed: the market is thinking about oil, but the medium term will be more dependent on monetary policy and not market volatility," said Josh O'Byrne, G10 currency strategist at Citi in London.
"Into year end though, there is some incentive to close positions and perhaps there is a shorter threshold for pain."
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