NEW YORK (Reuters) – U.S. and European shares rebounded from recent weakness on Friday, with reassuring U.S. retail sales data boosting sentiment, while U.S. crude prices rallied from more than 12-year lows.

Banking shares in the United States and Europe spiked, with the S&P financial index last up 3.4 percent and the STOXX 600 Europe Banks index gaining 5.6 percent.

The U.S. S&P 500 gained over 1 percent after five days of losses that had dropped it to its lowest level in two years on Thursday. In Europe, advances in shares of Deutsche Bank and its rival Commerzbank of 11.8 percent and 18 percent, respectively, helped European stocks rebound.

The FTSEurofirst 300 index of top European shares notched its biggest daily gain in five and a half months after hitting a two-and-a-half-year low on Thursday. The index was up 3.04 percent at 1,232.09.

The S&P financial index has fallen about 15 percent this year, and the European bank index nearly 25 percent, as worries over the impact of central banks’ negative interest rate policies on banks’ profitability intensified in recent days.

Commerce Department data showing U.S. retail sales excluding automobiles, gasoline, building materials and food services increased 0.6 percent in January also boosted optimism.

‘OVERWHELMING’ CHANCE OF RECESSION

“The market has gone from very little chance of recession to pricing in an overwhelming chance of recession despite the data not supporting that,” said Michael Jones, chief investment officer of RiverFront Investment Group in Richmond, Virginia.

“The more numbers you get like retail sales … the more this market can whipsaw people by heading right back up.”

An overnight drop in Asia shares limited gains in MSCI’s all-country world equity index. The index rose 2.61 points, or 0.74 percent, to 355.96.

On Thursday, it had closed more than 20 percent below its all-time high, confirming a bear market in global equity prices. Mainland China markets reopen on Monday after the Lunar New Year holiday.

On Wall Street, the Dow Jones industrial average was last up 226.72 points, or 1.45 percent, at 15,886.90. The S&P 500 was up 25.1 points, or 1.37 percent, at 1,854.18. The Nasdaq Composite was up 43.12 points, or 1.01 percent, at 4,309.96.

The S&P energy index was last up 1.7 percent. U.S. crude oil jumped as much as 13 percent on prospects for a coordinated production cut sparked by comments from the energy minister of OPEC member United Arab Emirates.

U.S. crude was last up 12 percent at $29.38 per barrel after hitting $26.05 a barrel on Thursday, the lowest in more than 12 years. Brent crude was last up nearly 10 percent at $33.03 a barrel.

Safe-haven 10-year Treasury notes were last down 30/32 in price to yield 1.75 percent after hitting 1.53 percent Thursday, their lowest yield since Aug. 2012.

The dollar rose after the U.S. retail sales data. The dollar index, which measures the greenback against a basket of six rivals, was last up 0.5 percent.

Spot gold was down $8.75 to $1,237.76 an ounce but was still set for its best week in four years.

(Additional reporting by Dion Rabouin and Tariro Mzezewa in New York, Libby George in London and Aastha Agnihotri in Bengaluru; Editing by Nick Zieminski and Bernadette Baum)

NEW YORK (Reuters) – Stock indexes worldwide fell on Thursday on fears over the health of the global economy and banking sector, with MSCI’s world stock index dropping to more than 20 percent below its all-time high, while safe-haven 10-year Treasury yields hit their lowest since 2012.

Concern over sluggish global growth and doubts over central banks’ ability to support the global economy pushed the U.S. benchmark S&P 500 index down 10.5 percent for the year. The FTSEurofirst 300 index of top European shares sank to its lowest level in 2-1/2 years.

The dollar hit its lowest against the safe-haven yen since October 2014, at 110.985 yen, and was on track for its worst week against the Japanese currency since 2008.

“There are mounting concerns about the ability of central banks to continue to prop up asset prices,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. “That’s part of why we’re seeing assets across the board come under pressure.”

Banks in Europe ended 6.3 percent lower, making them the worst-performing sector and widening their losses for the year to more than 28 percent. Shares of Societe Generale, France’s second-biggest bank, closed down 12.6 percent after disappointing results.

Worries also hit shares of U.S. banks, with the S&P financial index ending down about 3 percent. Concerns over profitability in a low-growth, low-interest rate environment have knocked confidence in the banking sector this week, particularly in Europe.

YELLEN

The declines came even as Federal Reserve Chair Janet Yellen sought to reassure investors in congressional testimony that the Fed will remain flexible in its approach. The markets, however, do not expect the Fed to raise rates further this year, compared with Fed forecasts that still point to more tightening.

“Credit has been signaling these concerns, and to some extent other markets, and particularly equity, have caught up with what credit had been telling them, which was: We’re really worried about global growth, we’re really worried that central banks are running out of ammunition,” said David Riley, head of credit strategy at BlueBay Asset Management in London.

Yields on benchmark 10-year U.S. Treasury notes hit 1.53 percent, their lowest level since August 2012, on the worries over global growth and the effectiveness of central bank policy.

MSCI’s all-country world equity index, which tracks shares in 45 nations, was last down 4.73 points, or 1.32 percent, at 353.35. The index hit its lowest level in more than 2-1/2 years and was last down more than 20 percent from an all-time high.

The Dow Jones industrial average ended down 254.56 points, or 1.6 percent, at 15,660.18. The S&P 500 lost 22.78 points, or 1.23 percent, at 1,829.08. The Nasdaq Composite dropped down 16.76 points, or 0.39 percent, to 4,266.84.

Europe’s broad FTSEurofirst 300 index closed down 3.68 percent at 1,195.76.

U.S. crude fell, hitting a 12-year low of $26.05 a barrel as domestic stocks grew and Goldman Sachs called for depressed prices until the second half of the year.

U.S. crude hit a more than 12-year low of $26.05 a barrel before settling down $1.24, or 4.52 percent, at $26.21 a barrel. Brent crude settled down 78 cents, or 2.53 percent, at $30.06 a barrel.

Safe-haven spot gold surged 5.3 percent to $1,260.60, the highest in a year. U.S. gold futures for April delivery settled up 4.5 percent at $1,247.80 per ounce.

(Additional reporting by Clara Denina, Simon Falush Kit Rees and Alistair Smout in London, Dion Rabouin, Tariro Mzezewa in New York, and Abhiram Nandakumar in Bengaluru; Editing by Bernadette Baum and Dan Grebler)

NEW YORK (Reuters) – Global stock markets are on their shakiest footing in years.

Investors are fleeing stocks and running to safe-havens like bonds and gold, driven by concerns about economic growth the effectiveness of central banks’ policies.

At the same time, tumbling energy prices are upending the economies of oil-producing countries, further slicing into global economic growth.

Only six weeks ago cheap oil prices were still expected to cushion the global economy, and the Federal Reserve’s decision in December to raise interest rates for the first time since the end of the financial crisis in 2008 was widely seen as a vote of confidence in the world’s largest economy.

In addition to the fall in U.S. stock markets, major stock indexes worldwide have also been hit hard, despite efforts by the Bank of Japan and the European Central Bank to spur growth through lower interest rates.

Large institutions and sovereign wealth funds, who borrowed in euro and yen, have been selling riskier assets, and are now buying back those currencies, undermining central bank efforts.

With Thursday’s decline, the S&P 500 stock index has lost 10.5 percent so far in 2016, its worst start to a year in history, according to Bespoke Investment Group, an investment advisory in Harrison, New York. The 10-year note’s yield has fallen to 1.63 percent, its lowest closing level since May 2013.

Here are some of the chief issues weighing on the market now.

WHAT IS THE BIGGEST REASON FOR THE SELLOFF?

The slump in equity prices which began late last year has deepened as banks grapple with negative interest rates in parts of Europe and Japan and the flattening of the U.S. Treasury yield curve.

“One of the new themes in markets is that (quantitative easing) has damaged the banks and that therefore it exacerbates the risk-off environment,” said Steve Englander, managing director and global head of G10 FX strategy at Citigroup in New York.

Negative interest rates on central bank deposits and on government bond yields undermine the traditional ability of banks to profit from the difference between borrowing costs and lending returns.

With a decline of 18 percent on the year, S&P 500 financials are by far the worst performing sector in 2016.

While the Federal Reserve has avoided introducing negative rates on reserves, in Congressional testimony on Thursday, Fed Chair Janet Yellen told lawmakers that the Fed would look into negative interest rates if needed.

“I wouldn’t take those off the table,” she said.

WASN’T ENERGY THE PROBLEM?

Higher levels of U.S. oil output, thanks to fracking technology, along with over-production by Saudi Arabia, contributed to a world-wide oil glut, sparking a steep fall in energy and other commodity prices at the start of last year.

At $27 a barrel, oil prices are now near 13-year lows and some analysts say they expect to see prices drop further.

Tumbling oil prices resulted in sharp contractions in the economies of oil-producing countries, and pushed up yields on corporate debt, leading to defaults in the energy sector.

“Investors whose livelihood revolve around oil and gas and commodities are liquidating because they need the cash,” said Stephen Massocca, chief investment officer at Wedbush Equity Management in San Francisco.

WHAT’S NEXT FOR THE FED?

Markets now do not expect the Fed to go ahead with its planned interest rate rises this year. The federal funds futures market now shows traders are not expecting the Fed to raise rates until at least February of next year. At one point on Thursday, futures contracts were even pricing in a slight chance of a rate cut this year, and investors said some of the rally in gold prices resulted from the possibility of a rate cut.

The move in fed funds futures has been accompanied by a rapid decline in the spread between short-dated and long-dated U.S. Treasury securities. The difference between the 2-year Treasury note yield and 10-year note yield has narrowed to 0.95 percentage points, the tightest it has been since December 2007. The flattening of the yield curve has often preceded recessions in the past.

The narrowing yield curve spread shows investors are less confident of economic growth, even though Yellen told Congress on Wednesday that U.S. economy looks strong enough that Fed may stick to its plan to gradually raise interest rates.

“Part of the problem is that the Fed is in a no-man’s land right now: not dovish enough for the doves and not hawkish enough for the hawks, so it’s not satisfying any point of view in the investment markets,” said Terri Spath, chief investment officer at Santa Monica-based Sierra Investment Management.

WHEN WILL THE FALL IN STOCKS END?

There are few signs yet that investors are dumping their holdings wholesale, typically a mark of a market bottom, said Alan Gayle, director of asset allocation at RidgeWorth Investments in Atlanta.

“It still seems to be focused on specific issues, whether it’s credit or it’s oil. But clearly there is a more defensive tone that the market is taking and we’re watching for signs of capitulation,” he said.

Similarly, Credit Suisse noted that hedge funds have been selling in February, but the scope of that selling “lacks the much anticipated capitulation trade that would signal a bottom.”

Credit Suisse also noted that macro-focused hedge funds have built up large U.S. equity short positions which have been a decent indicator of market direction in the past.

Even if the severity of the selling tapers off, 2016 will likely continue to be a bad year for stocks, said Mohannad Aama, managing director at Beam Capital Management in New York. The S&P 500 stock index is down approximately 10.3 percent for the year to date, while the Nasdaq Composite is down more than 15 percent over the same time.

“Although we’ve being seeing good job numbers, the general feeling is that the U.S. economy is nearing a peak and there is not much left as far as trends to be talked about,” Aama said.

(Reporting by Lewis Krauskopf, Ann Saphir, Howard Marcus, Saqib Ahmed, Jennifer Ablan, Chuck Mikolajzcak and David Randall. Writing by David Randall and David Gaffen.)