Growing political uncertainty in Europe, coupled with fresh evidence of economic weakness on the Continent, rattled global stock and bond investors Monday.
Stocks across the region plunged, dragging down U.S. shares. Investors fled debt of peripheral European nations—and even some core countries—for the safety of German bonds. Yields on 10-year bunds reached a record low and the Stoxx 600 index dropped 2.35%. The Dow Jones Industrial Average fell 102.09 points to 12927.17.
Amid the turmoil, traders noted the relative resilience of the euro, which finished Monday at $1.3158, down less than 0.5%. The currency's strength demonstrates that, at least for now, money is not flooding out of the euro zone, as it was late last year. Many investors have already slashed their investments in Europe, strategists and analysts said, reducing the likelihood of a mass exodus.
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But within Europe, the pressure continued to build. Dutch bond yields soared after the country's prime minister resigned amid the collapse of talks aimed at trimming Holland's budget deficit. Investors now are questioning whether Holland will lose its prized triple-A credit rating.
French bond yields also rose Monday, after the first round of France's elections Sunday reinforced expectations that Socialist candidate Francois Hollande will unseat President Nicolas Sarkozy. Some investors worry Mr. Hollande will slow France's efforts to trim its own deficit or push back against Germany's emphasis on fiscal austerity as the primary way to address the euro-zone debt crisis.
Stocks were hit especially hard by the political news, along with a weak reading on a European purchasing managers survey for April, which some analysts said pointed to a continued economic downturn for the Continent in the second quarter.
The French CAC-40 dropped 2.8% and is now in the red for the year, capping an ugly April that erased a strong first quarter. The benchmark Italian index fell 3.8% and is now near its lows of last September. In Germany, whose exporters depend on the rest of the euro zone's economy, the stock market sank 3.4%.
"The market in some sense is telling you that [it's] not very optimistic about future growth in the Eurozone," said Ashish Shah, head of global credit at asset manager AllianceBernstein Holding LP in New York, where he helps oversee about $224 billion.
Reflecting safe-haven buying, the yield on Germany's 10-year debt fell to 1.57%, the lowest since the creation of the euro, according to Tradeweb. That compares with a yield of 1.94% for the 10-year Treasury, which also is near historic lows.
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In the currency markets, some analysts suggest the euro's resilience reflects an absence of capital being pulled out of Europe by global investors, which would depress the value of the currency. Last year's selloff of peripheral debt was marked by significant waves of selling by global investors pulling money out of countries such as Spain, Italy and Portugal.
Earlier this year, when European peripheral debt rallied strongly, the buying came mostly from domestic banks, not foreign investors, analysts say. Foreign investors still holding onto European bonds tend be more heavily weighted in debt that is deemed quality, such as German, French or Dutch bonds.
"We hadn't seen a wave of incoming cash and so there's less to come out," says Raymond Attrill, head of currency strategy at BNP Paribas in New York.
Jens Nordvig, head of fixed income research for the Americas at Nomura, thinks that while capital flows haven't been much of a problem for the euro of late, they could soon push the euro below $1.30.
Japanese investors had been selling euro-assets in the second half of 2012, Mr. Nordvig says, and they did some buying in February. Now, he says, "they have started selling again," he says.
While the latest news could prompt some shifting among core euro-zone countries, especially among investors worried about Holland's AAA rating, the situation in Europe isn't seen as dire as it was last year when worries about the banking system combined with fears of a break-up of the euro-zone itself.
"It seems to sort of suggest that...the currency markets are less worried about an imminent banking collapse or an imminent event than they were in the fall," said Anders Ekernas, chairman and chief investment officer of Hillswick Asset Management, LLC, of Stamford, Conn. "This is more economic and less financial, more fundamental and less [about] banking systems."
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Europe concerns dominated in the U.S., overshadowing a smattering of earnings news. Crude-oil futures slipped 0.7% to settle at $103.11 a barrel, while gold futures eased 0.6% to finish at $1631.90 an ounce.
Meanwhile, Standard & Poor's said Phillips 66, which is being spun off by ConocoPhillips, would replace Supervalu in the S&P 500-stock index.
Wal-Mart fell $2.91, or 4.7%, $59.54, its biggest percent drop since January 2009 and accounting for more than a fifth of the Dow's point decline, after bribery allegations in Mexico prompted fears of legal risks ahead.
Kellogg tumbled 3.29, or 6.1%, to 50.70 after the cereal and snacks maker lowered its full-year profit and sales outlook, saying its first-quarter results were weaker than expected.
"European debt will most likely remain in the forefront of investors' minds," said Steve Hammers, chief investment officer of Compass EMP Funds, in Brentwood, Tenn. "The backlash against budget cuts are actually gaining momentum."
—Charles Forelle and Matt Jarzemsky contributed to this article.Write to Tom Lauricella at Tom.Lauricella@wsj.com and Matt Phillips at Matt.Phillips@wsj.com
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