Monday 22:00 BST: The euro touched a fresh four-year low, then recovered, as the single currency reflected the mood of investors still unsure of the direction of global markets after two weeks of sharp moves.

Risk appetite fluctuated throughout Monday’s session, as the euro plunged during Asian trade before moving into positive territory in the European session – before dipping and rising during US trading.

Asian markets sold off sharply, and European ministers added nothing to soothe investors’ nerves. It was reported that Jean-Claude Trichet, president of the European Central Bank, told Der Spiegel that the bail-out “bought time, nothing more”. He said “a quantum leap in the governance of the euro area” was still necessary.

Meanwhile, George Papandreou, prime minister of Greece, over the week-end threatened to investigate the investment banks that drove up its cost of lending. Jean-Claude Junker, prime minister of Luxembourg, also struck a tough tone, and said the declining euro “will not force us to our knees”.

The FTSE All-World index was down 0.9 per cent. The return of merger action, a gain in European shares, and the strongest reading in a measure of US real estate buying, the NAHB housing index, since August 2007 were cancelled out by a weak manufacturing report and sovereign debt anxiety.

The Treasury reported that foreign investors were net purchasers of US debt to the tune of $140bn in March, up from $47bn in February, amid record auctions of bonds. Yet 10-year Treasury yields still remain below 3.5 per cent.

“The bubble in the bond market is by far our biggest longer-term concern,” said Charles Biderman, chief executive of TrimTabs, an investment research firm. “If investors stop pouring huge sums into bonds, upward pressure on interest rates could choke the economy.”

Risk levels were elevated as well. Three-month dollar Libor futures, a measure of inter-bank lending caution, jumped 1.5 basis points to 0.46 per cent, its biggest rise since the correction began on May 6. The Vix index of volatility also returned to its May 6 level, remaining above 31 on Monday, even as US stocks pared losses from session lows.

“A lack of upside follow-through for the euro, a widening Libor-OIS spread, and a continued flight into the US dollar and gold suggest a lack of confidence in efforts to curtail Europe’s debt concerns,” said Mary Ann Bartels, head of US technical analysis at Bank of America Merrill Lynch.

Asian stock markets took a fearful pounding, led by Shanghai plunging 5.1 per cent to a 12-month low as investors continued to worry about the impact of monetary tightening by Beijing and the possible slowdown in global growth should mooted European austerity measures bite. The Hang Seng in Hong Kong burst through the 20,000 level, a big round number that markets tend to view portentously. It finished down 2.1 per cent at 19,715. The Nikkei 225 in Tokyo fell 2.2 per cent.

Thai stocks fell 2 per cent as the violence in Bangkok intensified.

“The Chinese equity markets were a clear leading indicator of what happened globally [in 2008] and with the Shanghai Composite now technically in bear market territory, that will not help investor confidence,” said Derek Halpenny, European head of global currency research at Bank of Tokyo-Mitsubishi UFJ.

In Europe, a day-long advance was put to the sword by a morning slide for New York. The FTSE Eurofirst 300 fell 0.2 per cent and London’s FTSE 100 was flat, having been higher by 1.2 per cent.

Wall Street showed signs of entering a defensive phase, with staples sectors gaining as shares levelled off from sharp declines to end the session flat.

● The euro was down 1 per cent to $1.2235 at one point, its lowest mark since 2006 after it was revealed that the ECB had been buying government debt. It later recovered to gain 0.3 per cent to $1.2398 by the end of trading.

The dollar and yen were the main beneficiaries of early haven flows, but later pared gains. The US unit slightly rose to 86.13 on a trade-weighted basis, at one point hitting a 14-month high of 86.88.

Sterling is rallying off its low of $1.4253 also hit in early Asian trading, and is now down 0.3 per cent at $1.4491.

● US debt reversed earlier gains as stocks pared losses – the yield on the 10-year Treasury was up 3 basis points at 3.49 per cent.

Eurozone bond markets were anxious, with the yields on “Club Med” moving higher. Greek 10-year yields rose 36 basis points to yield 8.05 per cent. Spain was up 4bp to 3.98 per cent, and Portugal advanced 5bp to 4.67 per cent.

The promise of a new fiscal watchdog for the UK did little to salve investors’ anxiety about the state of the nation’s budget. Ten-year gilts are underperforming sovereign peers, their yields up 1 basis point to 3.73 per cent.

● Commodities were hard hit in early trading as Asian investors fretted about the possibility of slowing demand from China, and this accelerated as the global session progressed. Copper, the industrial metal benchmark, is off 5.9 per cent to $2.97 a pound. Nymex oil touched a low of $69.27 and was trading at $70.50, down 1.6 per cent. Crude was $87 a barrel just two weeks ago.

● Gold fell back from last week’s nominal record intra-day high of $1,249, losing 0.9 per cent to $1,222 a troy ounce.

Follow Jamie Chisholm’s market comments on Twitter: @JamieAChisholm

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