Wednesday, August 11, 2010

Stocks plunge, dollar rallies on growth fears

Stocks plunge, dollar rallies on growth fears

People are reflected on an electronic board displaying share prices outside a brokerage in Tokyo July 6, 2010. REUTERS/Yuriko Nakao

NEW YORK | Wed Aug 11, 2010 5:45pm EDT

NEW YORK (Reuters) - Fear roiled global markets on Wednesday, with stocks sinking and the dollar making its biggest one-day gain in nearly two years against most currencies.

Despite the dollar's broad gains, the Japanese yen hit a 15-year high against the greenback as declining yields on U.S. government debt prompted Japanese funds, heavily invested in dollar-denominated Treasuries, to repatriate profits.

Commodity prices fell, with oil prices sliding 2.8 percent, on fears that a global economic slowdown led by the United States and China would reduce demand for raw materials. U.S. gold futures ended only slightly higher as gold's initial sharp gains faded during the stock market's steep slide.

The three major U.S. stock indexes ended the session with losses of 2.5 percent to 3 percent, turning negative once more for the year so far.

Fears about the sustainability of the global economic recovery increased after the U.S. Federal Reserve announced on Tuesday it would use cash from maturing mortgage bonds it holds to buy more government debt, maintaining the current level of monetary stimulus.

U.S. Treasury debt prices rallied, with the 10-year note's yield near 16-month lows, in response to the Fed's expected re-entry into the bond market and stocks' sharp sell-off.

Some investors saw the measure as a sign that policy- makers want to support financial markets while the economy goes through a possible pause in growth.

"I don't think that we are in for a major correction for the equity market," said Klaus Wiener, head of research at Generali Investments in London.

"The Fed is willing to support the economy. If the economy slows but does not fall into recession as I expect, then market confidence in the economy could improve again," he added.

But that strategy, at least for now, seemed to have backfired.

"If one of the Fed's goals in yesterday's statement was to instill confidence in the market that they will do anything to make things better, they accomplished the exact opposite in that today we are even more worried about economic growth," Peter Boockvar, equity strategist at Miller Tabak & Co in New York, said in a note to clients.

NASDAQ DOWN 2.7 PCT FOR YEAR

Adding to investors' woes was data showing a slowdown in Chinese investment and factory output growth, coupled with a Bank of England's downgrade of its growth forecast and a dovish tone from its governor, Mervyn King.

Chinese annual factory output growth slowed to 13.4 percent last month from 13.7 percent in June ,but beat forecasts of a 13.2 percent rise. Year-to-date growth in fixed-asset investments slowed to 24.9 percent from 25.5 percent.

"If China's economy slows down, industries worldwide will likely feel it in their revenue. That could darken the jobs picture in this country even further than it already is," said Keith Bliss, senior vice president at Cuttone & Co in New York.

The MSCI All-Country World index fell 2.7 percent, while the FTSEurofirst 300 index of top European shares tumbled 2 percent to end at 1,040.87 -- a three-week closing low.

Banking and commodity shares led European markets lower, with the STOXX Europe 600 banking index .SX7P falling 3.4 percent.

On Wall Street, the Dow Jones industrial average .DJI lost 265.42 points, or 2.49 percent, to end at 10,378.83, while the Standard & Poor's 500 Index .SPX sank 31.59 points, or 2.82 percent, to 1,089.47. The Nasdaq Composite Index .IXIC tumbled 68.54 points, or 3.01 percent, to close at 2,208.63.

For the year, the Dow was down 0.5 percent, while the S&P 500 was off 2.3 percent and the Nasdaq was down 2.7 percent.

U.S. Treasuries rallied, with the two-year note's yield touching a record low of 0.493 percent earlier in the session.

The benchmark 10-year note shot up 26/32 in price, with the yield at 2.68 percent, a 16-month low.

"The fall in U.S. yields is a barometer of the cyclical position of the U.S. economy," said Adam Cole, head of currency strategy at RBC Capital Markets.

"The market's reaction is that if the U.S. economy is slowing materially, it will not be in isolation, and it has therefore responded by selling risk."

DANCE OF THE RISING YEN

The dollar gained against a basket of major currencies as investors became more averse to risk, with the U.S. Dollar Index .DXY up 2.11 percent, its biggest one-day rise since October 2008.

The euro was down 2.32 percent at $1.2871.

The greenback was practically flat against the Japanese yen, however, after touching a 15-year low around 84.72 yen earlier in the session.

Appetite for the yen increased as Treasuries' yield spreads over Japanese government debt narrowed, prompting the Japanese Finance Minister Yoshihiko Noda to say he was closely watching forex markets.

Analysts said, however, his rhetoric was unlikely to escalate into currency intervention to weaken the yen.

U.S. crude oil fell $2.23, or 2.78 percent, to settle at $78.02 a barrel. Crude oil futures prices were also pressured by a government inventory report showing refined products stockpiles rose more than expected last week, even though refiners reduced capacity more than 3 percent.

In New York, U.S. gold futures gained $1.20 to settle at $1,199.20 an ounce, off an intraday high at $1,210.20.

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