After a quiet session across Asia owing to the Chinese New Year, European share markets opened higher on Monday, but quickly relinquished initial gains over the day, ending down about two percent in London and more than three percent in Paris and Frankfurt.
The German DAX slumped below the psychologically-important 9,000-point mark for the fist time since October 2014, closing at 8,979, due to renewed stress in the financial sector triggered by worries over weak growth in the eurozone and emerging market economies. The rout deepened after oil prices resumed their slide.
Among the biggest losers Monday were Germany's two biggest banks, Deutsche Bank and Commerzbank, which fell more than ten and eight percent respectively.
Financial crisis revisited?
Mounting concerns over the health of the global banking industry has already led some to draw comparisons to the early days of the global financial crisis in 2008.
Borrowing costs for some of Europe's most indebted countries edged higher as investors were fleeing to the relative safety of Germany's low-risk government debt and into gold.
Owen Callan, senior analyst at Cantor Fitzgerald, said investors were worried about the global economy and were "beginning to look at the banks."
"You are seeing more and more people saying: is this 2008 again? Maybe not quite as severe, but do we need to be worrying about the banking sector and risk assets on a bigger level?," he told the news agency Reuters.
The cost of insuring the subordinated debt of European lenders rose 12 percent on Monday to its highest since April 2013, Markit's iTraxx index showed. A similar index for financials' senior debt hit its highest since October 2013. Both indices are up around 40 percent since the past week.
Assessing those figures, Jaisal Pastakia, investment manager at Heartwood Investment Management, said that in a climate of negative interest rates and prolonged dovish monetary policy, banks' profitability would be squeezed. "A high level of unprofitable loans on banks' balance sheets impacts the broader economy by stifling both domestic demand and bank lending growth," he told Reuters.
China currency woes
Markets were said to be reacting also to the weekend's news that China's foreign exchange reserves had fallen to their lowest level in more than three years, as Beijing sells US dollars to stop the yuan from depreciating further.
China's currency reserves shrank by $99.5 billion (89.5 billion euros) in January to some $3.2 trillion, the People's Bank of China said on its website, the lowest since May 2012.
Worries about China's economy, the world's second biggest, have pushed the yuan to a five-year low. The country saw its first-ever annual decline in foreign exchange reserves last year as Beijing tried to prevent a more drastic devaluation.