Europe lockdown fears knock stocks, spark dash for bonds

European stocks retreated from record highs, while government bond yields, oil prices and the euro tumbled on Friday as the specter of a fresh COVID-linked lockdown in Germany and other parts of Europe cast a fresh shadow over the global economy.

Markets went into a tailspin after news that Austria will become the first country in western Europe to reimpose a full coronavirus lockdown to tackle a new wave of infections and that Germany could do the same

Germany's health minister Jens Spahn warned the coronavirus situation in Europe's biggest economy was so grave that a lockdown, including for those vaccinated, cannot be ruled out.

"A total lockdown for Germany would be extremely bad news for the economic recovery," said Ludovic Colin, a senior portfolio manager at Swiss asset manager Vontobel.

"It's exactly what we saw in July, August of this year in parts of the world where the Delta was big, it (COVID-19) came back and it slows down the recovery again."

The news fuelled a dash for so-called safe assets such as government bonds, the dollar and the yen.

As the dollar surged 0.5%, the euro plunged to $1.1283, heading back towards a July 2020 low hit earlier this week . European and U.S. bond yields tumbled 5-6 basis points while equity markets reversed early-session gains.

While the pan-European STOXX 600 index slipped a quarter of a percent, Italian and Spanish shares slid more 1% and growth-sensitive banking stocks plunged almost 3%.

The shares later clawed back some of those knee-jerk losses.

But the effects rippled across world markets, taking Wall Street futures lower, while Brent crude futures dropped below $80 a barrel, extending earlier losses.

SAFE-HAVENS SHINE

It was a day for safe-havens assets to step back into favour.

Japan's yen rallied a third of a percent versus the dollar to 113.93 and the greenback index surged back towards 16-month highs hit recently.

Government bonds, battered in recent weeks by high inflation and expectations for higher interest rates, saw a sharp rally.

It took Germany's 30-year bond yield back below 0% for the first time since August which mean the country's entire yield curve is in negative territory.

Germany's 10-year yield, the euro area benchmark, fell to the lowest since mid-September at -0.33%, down 5 basis points, having started the day a touch higher.

U.S. and British yields fell 3-5 bps.

ALIBABA HIT TO ASIA

Asian markets earlier in the day had their share of gloom, as e-commerce giant Alibaba reported disappointing earnings, reinforcing worries about slowing Chinese economic growth

MSCI's Asia-Pacific index excluding Japan fell 0.44%, after Alibaba's 10% share price loss.

Poor performance by Baidu, and Bilibili, whose shares are suspended, reinforced the downward trend.

Finally, Bitcoin slipped to the lowest since mid-October and is set for its worst week in six months -- 20% below recent record highs.