Asian shares slid and the euro hovered near multi-year lows hit in early trade on Monday, as Spain sparked concerns about its ability to stave off a sovereign bailout after two indebted regions sought financial assistance from the central government.
Fears the euro zone's fourth largest economy will be forced to follow Greece, Portugal and Ireland - which were thrown lifelines by international lenders after their borrowing costs shot above sustainable levels - intensified a flight to the safety of US Treasuries, pushing their benchmark 10-year yield to a record low early in Asia.
Oil fell more than $1, with Brent at $105.51 a barrel and US crude at 90.51 a barrel, hit by Spanish fiscal woes, while corn and soybean prices eased from record highs scaled on Friday.
MSCI's broadest index of Asia-Pacific shares outside Japan tumbled 2% while Japan's Nikkei stock average slid 1.5%, after global equities markets were slammed on Friday when Spain's Valencia region sought financial aid from Madrid.
Spain's main stock index plunged 5.8% for its biggest one-day drop in two years and Spanish 10-year government bond yield scaled a euro-era high at 7.32%.
More bad news emerged over the weekend from Spain when another region, Murcia, said on Sunday it would seek government financial assistance, while media reported half a dozen regional governments were ready to follow in the footsteps of Valencia.
The euro extended its fall against the Japanese yen, hitting its lowest since November 2000 around 94.60 yen, and slipped to a two-year low against the US dollar around $1.2103. The single currency also plumbed record lows against the Australian and New Zealand currencies at A$1.1671 and NZ$1.5104 in thin early trade.
"There is nothing good from Europe and that keeps the euro under pressure, especially the first half of the week when we have euro zone data", said Yuji Saito, director of foreign exchange at Credit Agricole Bank in Tokyo, referring to consumer confidence and manufacturing reports due on Monday and Tuesday.
"Markets may test more psychological support levels, having seen the euro already hit historic lows."
In data collated to July 17, speculators had increased bets against the euro while increasing their bets in favour of the US dollar.
The prime minister of Greece, which until last month was at the centre of the euro zone debt crisis, said it was in a "Great Depression" similar to the United States in the 1930s, two days before international lenders arrive in Athens to sort out further rescue payments to keep the debt-laden country afloat.
Asian credit markets faltered with the retreat in risk appetite, widening the spread on the iTraxx Asia ex-Japan investment-grade index by 9 basis points.
G3 sovereign bonds outperform
Investor preference for safety over return pushed 10-year Treasury yields down to a record 1.4365% in early Asian trade on Monday, dragging the 10-year Japanese government bond yield down to a nine-year low of 0.73% and lifting 10-year JGB futures to nine-year highs.
Two-year bond yields have dipped into negative territory in core triple-A rated Germany and the Netherlands, which could prompt investors who are bearish on the euro's outlook to seek investment elsewhere for some return, including in JGBs.
"The strength in G3 government bond markets is a reflection of how tense global financial markets are," said Takafumi Yamawaki, chief Japan rates strategist at JPMorgan in Tokyo.
"Investors are looking at nominal interest rates, so JGBs may be appealing for them," he said, adding that if the euro zone debt crisis deteriorates further, the 10-year JGB yield could even fall below 0.70% in the near-term.
As the euro zone's three-year debt crisis deepens and heightens contagion risks, putting a drag on the global economy, a surge in grains prices was threatening to further undermine fragile growth prospects.
Analysts expected food prices to increase in the wake of the rally in grains, with some seeing a looming food crisis similar to that in 2008, when riots broke out in some countries.
With the worst US drought in 56 years showing no sign of abating, Chicago Board of Trade soybean futures rose to a record high $17.77-3/4 a bushel on Friday, while CBOT corn hit an all-time of $8.28-3/4.
Soybean futures fell to $17.33-3/4 while corn also fell to $8.12 on Monday ahead of the US Department of Agriculture's crop condition report due later on Monday.
