The global retreat from risk intensified Tuesday, sending the Dow industrials to a 295.64 point decline and pushing U.S. crude futures to their deepest two-day drop since the financial crisis.

Investors around the world sold stocks, registering losses of 2% or more in many indexes across Europe, and purchased government bonds. The yield on the 10-year U.S. Treasury note tumbled to 1.864%, a level last seen in the spring of 2015. Yields fall when prices rise.

The action came on a day that had no major economic news beyond a few downbeat earnings reports. Selling was intense in economically sensitive sectors, such as energy, banks, asset-management firms and cruise lines, and in industries whose shares often led the market during the long U.S. bull run starting in 2009, such as biotechnology.

Utility stocks rallied, reflecting the promise of regular periodic payouts that investors covet at a time when interest rates are low and markets are in flux.

Yet even as stocks tumbled and bonds gained Tuesday, closely watched sentiment gauges didn't signal unusual levels of fear, a sign that investors said likely suggests that a wholesale flight to the exits isn't likely.

Gold fell 60 cents, or less than 0.1%, and Wall Street's fear gauge, the CBOE Volatility Index of options-derived trading expectations, remained far below highs reached in August's market rout.

"It tells me that perhaps the panic isn't there," said Rob Bernstone, managing director in equity trading at Credit Suisse. "People don't think the world is about to end, but they do think that, on a risk-adjusted basis, equities don't deserve the valuation that they had this morning."

Yields on two-year government bonds in Japan and Finland set all-time lows below zero. Yields from Germany, France, the U.K., Belgium, Denmark and Sweden all fell.

Yields have fallen in many developed nations since the start of the year as a big drop in global stocks and oil pushed investors to focus on preserving capital. The slide in yields picked up more momentum after the Bank of Japan surprised the global markets Friday by lowering some short-term interest rates below zero, joining the ranks of central banks in the eurozone, Switzerland and Denmark in adopting negative rates.

"We have absence of growth, absence of inflation and continued monetary stimulus," said Nick Gartside, international chief investment officer of global fixed income at J.P. Morgan Asset Management, which had $1.7 trillion in assets under management at the end of December. "The bond market signals that the era of low growth and low inflation is here to stay."

Tuesday's action was the latest sign that financial markets are struggling to make sense of a constellation of unusual and often contrary signals on the most basic questions, such as whether the U.S. economy is headed for recession and whether the Federal Reserve made a mistake in December when it raised short-term interest rates for the first time since 2006.

The turmoil this year has prompted many investors to dive deeper into market entrails, searching for answers in arcane indicators and the correlations in seemingly loosely related markets such as oil, which has fallen 11% in two days to settle at $29.88 a barrel, and large-cap U.S. stocks. Yet few have come away feeling they have a hammerlock on what is happening.

On Tuesday, some well-known fear indicators clashed. Japan's yen rallied, a classic haven signal, but the Swiss franc, another mainstay of investors seeking refuge, rose just 0.1% against the dollar.

"People don't know what to do," said David Kotok, chief investment officer at Cumberland Advisors in Sarasota, Fla. "Those that are scared sell stuff and you have a self-fulfilling downward spiral that has an emotional component, and it lasts until the sellers are exhausted."

Riskier investments whose gains typically exceeded the market average during the past seven-year bull market were hit hard. The Russell 2000 index of small-cap stocks sank 2.3%. The Nasdaq Biotechnology Index lost 3% and has lost nearly one-fourth of its value so far this year.

The KBW Nasdaq Bank Index dropped more than 3%, taking the gauge of large commercial lenders down 16% for the year. Declines have foiled investors who gambled that the Fed's decision to begin raising interest rates would bolster the fortunes of financial stocks by allowing them to make more money from their lending businesses.

Helping to drive Tuesday's declines, traders said: the sharp drop in U.S. interest rates, which followed several downgrades of the global growth outlook and the Bank of Japan's decision to move to negative interest rates.

The decline in financial shares raises fears that the U.S. could be headed for recession, but many investors said they believe employment growth heralds a continued U.S. expansion. They are focusing instead on earnings, which are expected to fall this quarter, and other unusual sources of market uncertainty, such as the presidential election season.

"How do we break out of that funk? We've got to have some earnings," said Bob Doll, senior portfolio manager at Nuveen Asset Management LLC. "Why is the stock market not going up? Because earnings are not going up."

Many investors are finding it difficult to paint a picture of the global economic outlook with the divergent paths of growth and monetary policy for the U.S. and the rest of the world. Japan's move to negative rates is the latest but far from the only example, as many analysts focus on the possibility of a devaluation of China's yuan.

"No doubt markets are generally confused, with divergent monetary policy and a subtle currency war going on globally," said Firas Askari, global head of currency trading at BMO Capital Markets.

The Swiss franc, which traditionally drew investors to protect capital in time of market stress, has failed to gain ground this year. On Tuesday, the yen attracted stronger haven flows, up 0.8% against the dollar. The franc lagged, up 0.1% versus the dollar.

"The franc is no longer the currency to buy amid risk aversion," said Paresh Upadhyaya, portfolio manager at Pioneer Investments, which managed $243.4 billion at the end of December. Mr. Upadhyaya said negative interest rates adopted by the Swiss National Bank have put a dent on foreign investors' interest in buying the franc.

The VIX, rose 10% to 21.98. Investors aren't paying up for options that protect against a plunge in the S&P 500 to the degree that they were in the late-summer turmoil, said Michael Purves, head of equity derivatives research at Weeden & Co.

"The world isn't falling apart, according to the options market," he said.

Saumya Vaishampayan and Aaron Kuriloff contributed to this article.

Write to Dan Strumpf at daniel.strumpf@wsj.com, Ira Iosebashvili at ira.iosebashvili@wsj.com and Min Zeng at min.zeng@wsj.com

 

(END) Dow Jones Newswires

February 03, 2016 00:15 ET (05:15 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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