Stocks Slump Worldwide as Investors Flee Risk

By GRAHAM BOWLEY and JAVIER C. HERNANDEZ

Investors around the world made a dash for safety on Tuesday, fearing the possibility of a nuclear catastrophe in Japan.

Justin Lane/European Pressphoto Agency

Traders on the floor of the New York Stock Exchange at the opening bell on Tuesday.

Stock indexes in the United States, Asia and Europe fell nearly 1.5 percent as traders worried that the turmoil in Japan, the world’s third-largest economy, could slow down growth worldwide. Bond prices rallied and yields fell as investors turned to safe havens like the dollar and French, German and American bonds.

For investors, the questions were urgent but largely unanswerable: How significantly would production fall in Japan? Which companies were most at risk? How would a loss of nuclear power in Japan affect energy markets worldwide?

“Today is a panic day,” said Beat Lenherr, chief global strategist at LGT Capital Management in Singapore. “The question is, Where is the bottom?”

The benchmark index in Tokyo fell more than 11 percent, its lowest close in nearly two years and its largest two-day drop since 1987.

In the United States, the Dow Jones industrial average was down 162.53 points, or 1.4 percent, in afternoon trading, while the broader Standard & Poor’s 500-stock index dropped 16.29 points, or 1.3 percent. The Nasdaq lost 37.53 points, or 1.4 percent. As investors fled risky investments, they turned to bonds, sending the yield on the benchmark 10-year Treasury bond to 3.29 percent from 3.36 percent late Monday.

European indexes also fell significantly, with the DAX index in Frankfurt shedding 3.2 percent, the CAC 40 in Paris losing 2.5 percent and the FTSE 100 in London dropping 1.4 percent.

“Investors are moving to the sidelines,” Marc Chandler, global currency strategist for Brown Brothers Harriman, said. “They are selling the things they were buying and buying the things they were selling.”

The turmoil extended to energy markets, as analysts warned that diminished growth in Japan could prompt a sharp decrease in oil demand. “We don’t know the extent to which the post-tsunami Japan is going to grow, and whether or not there will be consequences for other countries as well,” said Chris Lafakis, an energy economist for Moody’s Analytics.

Many companies with ties to Japan were hit hard. Shares of the insurance giant Aflac, which depends on Japan for much of its profit, fell more than 7 percent. Shares of General Electric dropped more than 2 percent; investors worried that the company would be liable for damages from a nuclear disaster, given its role in designing the reactors.

Luxury goods companies, which rely on strong Asian sales, were also down sharply. The luxury jeweler, Tiffany & Company, and the handbag designer, Coach, each fell more than 3 percent.

Commodity prices dropped on growth concerns after rising sharply in recent weeks. Oil prices fell $3.45 at $97.74, and copper, gold, corn, wheat and soybeans were all lower. Analysts said investors were moving their money from commodities to safer investments.

“It is a flight to cash,” Mike Zarembski, a senior commodity analyst at OptionsXpress, said. “They are selling to get into cash or the try safe havens like U.S. Treasuries, Swiss franc and U.S. dollar.”

As investors tried to assess the fallout from the crisis in Japan, the broader concern remained the potential harm to the global recovery. In particular, analysts were worried that disruption to supply lines in Japan, home to some of the world’s biggest manufacturers and technology firms, could spread to other countries and increase the risk of a global slowdown.

Economists said the disaster would almost certainly lead to a contraction in the Japanese economy in the second quarter, but that the economy could rebound later in the year as workers rebuilt infrastructure.

Carl Weinberg, chief economist at High Frequency Economics, said that “every company in Japan almost certainly faces worse prospects for growth than it did before last Friday,” when an earthquake spurred a tsunami that led to the nuclear crisis. He said Japan’s banks were particularly fragile and could affect banks in Europe and the United States.

Philippe Gijsels, head of research at BNP Paribas Fortis in Brussels, characterized the sell-off in stock markets on Tuesday as a “knee-jerk” reaction to events in Japan, but noted that policy makers have limited tools to handle major economic shocks, given the high level of budget deficits in the West and the fact that monetary policy options are almost exhausted.

Analysts at Credit Suisse and Barclays Capital have estimated the damage in Japan at up to 15 trillion yen, or $183.5 billion. Tohru Sasaki, a foreign exchange strategist at JPMorgan Chase, said that while the damage had been “very large,” in the long run, the stock market should reflect the prospect for corporate earnings. “But right now there’s no arguing with panic,” he said.

In a bid to contain the stock market sell-off and to prevent a sharp rise in the yen as companies repatriated cash to pay for the costs of the quake and tsunami, the Bank of Japan pumped more liquidity into the financial system Tuesday, adding to the record amounts that were injected Monday.

Brown Brothers said that the Bank of Japan added 8 trillion yen, or about $98 billion, to the financial system on Tuesday.