GLOBAL MARKETS-Japan shares dive, bond markets bet virus will force rate cuts

* Asian stock markets : https://tmsnrt.rs/2zpUAr4
* Markets price in risk of pandemic, deep damage to world
economy
* Nikkei sheds 1,000 points, matching Dow's dive
* S&P 500 futures try to bounce after Monday plunge
* Bonds fly as investors wager on central bank, fiscal
stimulus
* Oil leads commodities sharply lower on demand fears

By Wayne Cole
SYDNEY, Feb 25 (Reuters) - Asian shares extended losses on
Tuesday amid fears the coronavirus was rapidly mutating into a
pandemic that could cripple global supply chains and wreak far
greater economic damage than first thought.
Both U.S. and European equities suffered their steepest
losses since mid-2016, while demand concerns savaged prices for
oil and a whole swathe of industrial commodities.
Sovereign bond yields dived as investors sought the most
liquid of safe havens and wagered central banks would have to
ride to the rescue with a burst of new stimulus.
"This is a world now where economies are so intertwined that
it's hard to know what the economic impact will be," said
Rodrigo Catrill, a currency strategist at NAB.
"It's certainly hard to see a catalyst that might stop the
losses in the near term, though the market has moved
aggressively to price in U.S. rate cuts as early as June."
Futures for the Federal Reserve funds rate 0#FF: have
surged in the last few days to price in a better-than-even
chance of a quarter-point rate cut in April. In all, they imply
more than 50 basis points of reductions by year end.
Central banks across Asia have already been easing policy,
while governments have promised large injections of fiscal
stimulus, something western countries might have to consider.
For now, selling shares seemed to be the safe choice for
investors and Japan's Nikkei .N225 shed 3.7% for the biggest
daily drop since late 2018. The market was closed on Monday.
MSCI's broadest index of Asia-Pacific shares outside Japan
.MIAPJ0000PUS slipped another 0.2%, having already fallen 2.5%
on Monday. Australia .AXJO lost 1.8%, but South Korea's market
.KS11 was trying to stabilise.
E-Mini futures for the S&P 500 ESc1 actually bounced 0.5%,
having plunged overnight as the full implications of the virus'
spread finally caught up with Wall Street.
The Dow .DJI ended Monday down 3.55%, while the S&P 500
.SPX lost 3.35% and the Nasdaq .IXIC 3.71%. Wall Street's
fear gauge, the CBOE Volatility Index .VIX , jumped to its
highest close since early 2019.
Underlining the economic impact of the virus was a 3.5% drop
in Apple Inc AAPL.O as data showed sales of smartphones in
China tumbled by more than a third in January. BAY FOR RATE CUTS
The coronavirus death toll climbed to seven in Italy on
Monday and several Middle East countries were dealing with their
first infections, feeding worries it could turn into a
pandemic. "If travel restrictions and supply chain disruptions spread,
the impact on global growth could be more widespread and longer
lasting," said Jonas Glotermann at Capital Economics.
"While we still think that it would take a significant
deterioration in the outlook for the U.S. economy for
policymakers to cut rates, they may feel compelled to do so if
the virus spreads and leads to continued falls in the stock
market and inversion of the Treasury yield curve."
The rush to bonds drove yields on 10-year Treasury notes
US10YT=RR down 10 basis points to 1.37%, so paying less than a
three-month deposit. Yields are now rapidly approaching the
all-time low of 1.321% hit in July 2016.
The sharp drop, combined with the simple fact the Fed had
far more room to cut rates than its peers, kept the U.S. dollar
restrained after a run of strong gains.
The euro edged up a little from recent three-year lows to
reach $1.0853 EUR= , while the dollar was back at 110.90 yen
JPY= and away from a 10-month top of 112.21. USD/
Against a basket of currencies, the dollar was all but
steady at 99.339 =USD .
The search for safe harbours saw gold touch a seven-year
peak at $1,688.66 an ounce overnight. Profit-taking set in early
Tuesday leaving the metal at $1,646.26 XAU= . GOL/
Demand worries saw oil prices go the other way to shed
nearly 4% on Monday. U.S. crude CLc1 was up 5 cents at $51.48
on Tuesday, while Brent crude LCOc1 was yet to trade. O/R

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(Editing by Sam Holmes)