NEW YORK: Fear of a nuclear catastrophe in Japan pounded world stock markets on Tuesday, shredding $1 trillion in equity valuations as investors dumped assets considered risky and sought the safety of government debt.
Gold fell 3 percent at one point, on track for its biggest one-day loss since July, as the worldwide rout in stock markets forced speculators to sell bullion to cover equity losses.
The global wave of risk aversion slammed oil prices, driving Brent crude futures below $108 for the first time in three weeks.
"Investors around the world have been collectively trying to reduce their risk exposures across the board," Mohamed El-Erian, the co-chief investment officer at Pacific Investment Management Co in Newport Beach, California, told Reuters.
"This is a vivid illustration of top-down factors totally dominating bottom-up considerations when it comes to investor positioning," said El-Erian, who helps oversee $1.1 trillion in assets.
European shares fell to their lowest level in 3-1/2 months, the Nasdaq was on the cusp of turning negative for the year and Japan's Nikkei average sank 10.6 percent, marking its worse two-day sell-off since 1987 as reports of rising radiation near Tokyo rattled investors.
A crippled reactor at the nuclear complex in Fukushima exploded and sent low levels of radiation floating toward Tokyo, prompting some people to flee the capital and others to stock up on essential supplies.
The nuclear crisis is equivalent to a six on the INES scale of nuclear accidents that ranges from 1 to 7, Kyodo news agency quoted the French Nuclear Agency as saying. The 1986 Chernobyl disaster was a seven and Three Mile Island a five.
The "fear trade" sparked widespread selling in high-yield "junk" bonds, crude oil and global stocks, said Dan Fuss, vice chairman of Loomis Sayles, which manages more than $150 billion in assets.
"Our central bank will be supportive so markets do not go to pot, given the contagion factor," Fuss said.
MSCI's all-country world stock index, which was valued at about $28.6 trillion on Monday, shred about $1 trillion as the crisis thrust financial markets into turmoil. The index was down 2.7 percent after paring some losses.
Government debt prices rallied, with German Bunds outperforming other euro zone bonds, and yields on 10-year US Treasuries fell to a six-month low overnight. Tax-free US municipal bonds, which typically rally when stocks sell off, also rose sharply.
Munis, a $2.9 trillion market that local and state governments in the United States tap to finance roads, schools and other infrastructure, largely sat out Monday's worry-driven trade in Treasuries but gained on Tuesday.
Traders caught betting that prices would fall had to quickly reverse their positions.
The benchmark 10-year US Treasury note shot up 23/32 in price to yield 3.27 percent.
"The market will be very hesitant to set up new shorts after a rally like this," said Christian Cooper, head of dollar derivatives trading at Jefferies & Co. in New York.
At midday on Wall Street, The Dow Jones industrial average was down 207.34 points, or 1.73 percent, at 11,785.82. The Standard & Poor's 500 Index was down 22.04 points, or 1.70 percent, at 1,274.35. The Nasdaq Composite Index was down 44.43 points, or 1.64 percent, at 2,656.54.
The Japanese yen jumped against higher-yielding currencies as investors sold riskier assets in response to slower Asian economic growth. The yen, Swiss franc and US dollar found support from hedge funds and Japanese retail investors.
Against the yen, the dollar was down 0.93 percent at 80.85 and the euro was down 0.19 percent at $1.3964.
"With the threat of a major nuclear disaster unfolding, the Nikkei suffered its third-steepest drop in history," said Camilla Sutton, senior strategist at Scotia Capital in Toronto. "Foreign exchange markets are shedding risk, with the dollar, Swiss franc and yen all gaining ground."
Oil prices dropped sharply, with North Sea Brent crude sliding $3.07 to $110.60. Earlier, Brent crude fell below $108 a barrel for the first time in nearly three weeks.
US light sweet crude oil lost $2.49 to $98.70 a barrel.
"This is a massive risk-off day today," said Christin Tuxen, analyst at Danske Bank. "The risk averse sentiment is coming through both in the equity market and euro/dollar. It's weighing on oil even though fundamental drivers should suggest an upside."
Government debt prices rallied, with German Bunds outperforming other euro zone bonds, and yields on 10-year US Treasuries falling to a six-month low overnight.
Traders caught betting that prices would fall had to quickly reverse their positions.
The benchmark 10-year US Treasury note shot up 21/32 in price to yield 3.29 percent.
"The market will be very hesitant to set up new shorts after a rally like this," said Christian Cooper, head of dollar derivatives trading at Jefferies & Co. in New York.
US stocks tumbled more than 2 percent early in the session but later pared some losses. Shares seen as exposed to the disaster and economically sensitive stocks fell sharply.
Spot gold prices fell $34.25 to $1,392.40 an ounce.
Comments
Comments are closed.