UPDATE: Renewed Risk Aversion Hits Financial Markets

LONDON -- Stock and oil prices fell steeply, bond prices climbed, and the yen and the dollar were both in demand Monday as a strong bout of risk aversion hit the European financial markets.

Falls in the U.S. stock markets also seem likely, with losses recorded for stock index futures ahead of the open.

"Everyone seems at once to be rushing for life preservers that only a few seem capable of gathering about them," said Dennis Gartman of The Gartman Letter.

The knock to sentiment was attributed to news of a fall in U.S. consumer confidence Friday, the closure by regulators of Colonial BancGroup and a slump in stock prices in Shanghai Monday.

The University of Michigan's index of U.S. consumer sentiment fell to 63.2 in August from 66.0 in July. That was a disappointment as the analysts' consensus pointed to a rise in the index to 68.5.

The data hit confidence in the financial markets all round, and that was exacerbated both by the Colonial BancGroup news after the close Friday and on Monday by a 5.8% fall in the Shanghai Composite stock market index.

"The large gains in (Chinese stock markets in) the first half recreated a bubble in the market, so when the government showed signs of tightening bank credit there was a selloff," said Zhang Yong, an analyst at Great Wall Securities.

Europe's equity markets followed Asia's, and by 1100 GMT the pan-European Dow Jones Stoxx 600 index was 2.3% lower. Among the major national indexes, the FTSE 100 in London was down 2.0%, the DAX in Frankfurt was 2.2% lower, and the CAC-40 in Paris was down 2.4%.

U.S. stock index futures suggested Wall Street would follow suit, with the September Dow Jones Industrial Average contract down 1.9%, September S&P 500 futures down 2.1% and the September Nasdaq 100 contract down 1.9%.

"After a weak start for European markets, it's not too much of a surprise to see U.S. markets looking to go heavily lower later this afternoon," said Ian Griffiths, a dealer at CMC Markets. "We may see the negative sentiment that has dragged on Asia and Europe continue to affect global markets and, with commodities also looking weaker, the recent positive run may be at risk of being followed by a sustained move to the downside."

As money was withdrawn from stocks, safe-haven government bonds benefited. September German bund futures were up 0.26 at 122.15 and September U.K. gilt futures climbed 0.49 to 119.20.

In the energy markets, oil futures tumbled. The September Nymex light, sweet crude contract dropped $1.74 to $65.77 per barrel - falling below $66 for the first time this month.

There were widespread falls for both precious and base metal prices too, while in the foreign exchanges there was demand for dollars and yen at the expense of euros and sterling, as well as the Australian and New Zealand dollars.

"Since mid July the international stock markets have been in an uptrend which has also fuelled risk appetite and the higher-yielding currencies, in particular AUD and NZD. This trend had eased notably recently as doubts about the sustainability of the recovery are now emerging," said analysts at Commerzbank in a note to their customers.

"Over the next few days, the question as to whether the recovery of the stock markets may not have gone far too far already while a rapid recovery of the global economy is still far from certain will put pressure on the higher yielders. In addition to AUD and NZD, the Eastern European currencies in particular are going to suffer," they added.