Investor sentiment was hit by a storm of negative news today, sending markets across the globe into sharp decline.

With the spread of the Eurozone sovereign debt crisis to Spain, the expected failure of the US to agree to budget cuts and the negative outlook coming out of China this weekend, investors fled from risky equities.

The FTSE 100 reeled in the face of the negative sentiment, dropping 1.74 per cent to 5,268.74 at 2.30pm. The fall was reflected across Europe, with the markets in France, Germany, Spain and Italy all falling over 2 per cent. The US markets have also all opened lower this afternoon.

As is typical for this type of risk-off sentiment, the mining and banking sectors were the hardest hit, with only Tate & Lyle, Capita and Centrica bucking the downward trend.

China’s vice-premier Wang Qishan damaged sentiment by commenting on Saturday that a ‘chronic’ global recession was ‘certain’, and that China should move its focus inward on domestic concerns.

The yield on Spanish ten-year bonds has continued to rise, going above 6.6 per cent this morning as the landslide victory of Mariano Rajoy from the People’s Party in elections last night failed to placate the markets.

Worst of all was the news that the so-called ‘super committee’ set up in the US to propose $1.2 trillion in spending cuts is likely to fail to agree on a set of proposals by its Wednesday deadline.

If it fails, it would trigger an automatic round of harsh spending cuts, primarily to welfare programs and defence spending, though these won’t take effect until 2013.

However, the automatic cuts could themselves be neutered as neither major party wants to see them happen, leaving the possibility of yet more bipartisan inaction in the world’s largest economy.

Jane Foley, senior currency strategist at Rabobank, warned, ‘If the US's automatic triggers on spending cuts are watered down, the chances of a credit rating downgrade from Fitch and Moody's would likely increase.’

Spanish bond yields have steadily increased through November and Rajoy’s victory last night is unlikely to stem the tide, firstly because he is yet to outline any specific austerity measures and, secondly, his government will not take over until mid-December.

The yield spread over German bonds is now over 450 basis points, the point at which clearing houses tend to raise margin requirements, and that could cause Spanish yields to rocket even more.

Kathleen Brooks, research director at Forex.com, commented, ‘When LCH Clearnet increased margin requirements for Italy its bond yields surged beyond 7 per cent and risk assets tanked. Since the clearing houses need to be consistent with their actions, Spain could be next on their list so expect volatility.’

With very little economic data on the horizon, and no sign of a spending cut deal in the US, analysts have warned that the downward trend could be set to continue for the rest of the week.

David Jones, chief market strategist at IG Index, claimed, ‘It’s difficult to see what’s going to turn this around in the short term. This negative news may well have set the tone for the week, unless we get some surprisingly good news from the US or from Europe, which I wouldn’t bank on.’