European Stocks Are Getting Pummeled And Bonds Are Rallying Worldwide

Stocks are falling and bonds are rallying this morning as geopolitical and fundamental economic concerns weigh on global sentiment.

In the U.S., S&P 500 futures are marginally negative, while 10-year U.S. Treasury futures are up 0.1%, and the yield on the 10-year note is 2.65%, one basis point below yesterday's close.

European indices are in the red across the board - with the German DAX leading the way lower, currently down 1.0% - while French, Portuguese, and Italian government bonds are leading the rally in euro zone debt, all with yields 6 basis points below yesterday's close.

The U.S. dollar is weakening against the yen, and the euro is weakening against the dollar.

The ongoing political situation in Ukraine and Russia continues to capture attention. The Ukrainian hryvnia continues to plunge to all-time lows, and conflict appears to be on the rise in Ukraine's Crimea region, where ethnic Russians comprise the majority of the population.

Citi strategist Valentin Marinov notes that over the past few sessions, the euro has weakened against the dollar in tandem with the Russian ruble.

"Recent FX price action seems to point at growing euro sensitivity to the intensifying tensions between Ukraine and Russia," says Marinov.

"Among the likely explanations is the dependence of the euro zone on oil and gas imports from Russia and the fact that all but one of the pipelines pass through Ukraine. Potential escalation in the tensions between the two countries could fuel concerns about supply disruptions, which could add to the headwinds for the fragile recovery in the euro zone. Such headwinds may be exacerbated by the existing trade and financial sector links between the E.U., Russia and Ukraine."

The euro is also likely weakening ahead of next week's monthly meeting of the ECB governing council to vote on monetary policy. Many believe tomorrow's flash euro zone inflation release could point to further disinflation in February, spurring the ECB to act, possibly by lowering the benchmark euro area refinancing rate.

"With all the talk about Russia and Ukraine I think participants are losing sight of what is happening in longer end," says Tom Tucci, head of U.S. Treasury trading at CIBC World Markets.

"Europe has a full blown deflation trade working and the U.S. has a large pension/insurance bid chasing long-end yields. There is a complete under supply in longer end of market."