LONDON/NEW YORK, March 24 (Reuters) - Global stock markets swooned on Friday as investors sold bank stocks on festering concerns about the health of the financial system, with the flight from risk shoring up the dollar and driving bond yields lower.
Market sentiment was hurt by a sell-off in the shares of Deutsche Bank (DBKGn.DE), which tumbled 10.6%, as its credit default swaps , which reflect the cost of insuring debt against the risk of non-payment, shot to their highest in more than four years.
"The growing sense of unease about the global banking system is heightening volatility in stock markets around the world," said Nigel Green, the chief executive officer of deVere Group, a financial advisor.
"As concerns about the stability of banks persist, we expect further and intensifying market volatility," Green said.
By late morning in New York, the Dow Jones Industrial Average (.DJI) was down 0.63%, the (.SPX) had lost 0.55%, and the Nasdaq Composite Index (.IXIC) fell 0.55%.
JP Morgan Chase (JPM.N) dropped 2.4%, the S&P 500 banks index (.SPXBK) was down 2.4%, while the KBW regional bank index (.KRX) was flat.
In Europe, the STOXX 600 index (.STOXX) was down 1.68%, helping to drag the MSCI World share index (.MIWD00000PUS) down 1.2%.
A STOXX sub-index of bank shares (.SX7E), which has swung wildly this week as traders debated if a forced weekend tie-up between Credit Suisse (CSGN.S) and UBS (UBSG.S) was a mark of stability or incoming systemic stress, dropped by 5.1% on Friday, heading for its third consecutive week of declines.
Deutsche had announced plans on Friday to redeem $1.5 billion of tier 2 debt due not due to be repaid until 2028.
The moves highlight just how frail sentiment remains after turmoil in the U.S. and European banking sectors in the past two weeks have revived memories of the 2008 global financial crisis.
U.S. Treasury Secretary Janet Yellen has this week tried to assuage investor fears about the health of U.S. lenders and the economic ramifications of a potential lending crunch if depositors flee smaller banks, which have outsized roles in supporting key sectors such as commercial real estate.
"I don't expect this volatility (in bank stocks) to subside anytime soon," said Peter Doherty, head of investment research at private bank Arbuthnot Latham in London.
Doherty said issues of "contagian risk within the U.S. banking sector" were undoubtedly weighing on appetite for bank stocks elsewhere.
Stronger demand for safe-haven assets, and bets that the Federal Reserve will soon pause its policy tightening cycle due to the turmoil in the banking sector, pushed the yield on the two-year U.S. Treasury , which tracks interest rate expectations, down about 10 basis points to 3.71%.
Traders have also priced in U.S. rate cuts of about 90 bps basis points to about 3.9% by the end of the year .
Euro zone government bond yields followed Treasury yields lower, with the 2-year German yields dropping by a hefty 25 bps to 2.25%.
In currencies, the dollar reversed a losing streak to gain 0.6% against major peers as risk aversion strengthened appetite for the reserve currency.
The yen, a safe haven currency, climbed 0.33% to 130.46 after hitting six-week high of 129.8 per dollar . The euro fell 0.8% to $1.07425.
Brent crude , the global oil benchmark, fell 2.5% to $74.02 per barrel.
U.S. regional banks Silicon Valley Bank (SIVB.O) and Signature Bank (SBNY.O) failed this month and shares in beleaguered First Republic Bank (FRC.N) have lost most of their value.
On Thursday, Yellen pledged further action to safeguard bank deposits, after saying a day earlier that blanket insurance was unlikely. Banks borrowed $110.2 billion at the Federal Reserve's discount window in the latest week, with the hefty drawdown of emergency credit suggesting some lenders were now unable to secure funds elsewhere.
The Fed raised its main interest rate by a quarter point to a range of 4.5%-4.75% on Wednesday, but signalled it would consider a pause in light of banking system stresses.
Markets, however, are betting on a U.S. recession and incoming rate cuts.
"You could have a period where you see a precipitous drop in the (availability of) credit in the U.S.," said Arun Sai, senior multi-asset strategist at Pictet Asset Management. "This takes us closer to a hard landing, to a U.S. recession."
