U.S. Stocks Temper Global Market Rout

Stocks in the U.S. moderated losses, bucking a global selloff that began with a 7.3% plunge in Japan's stock market. Markets around the world have been jostled by a series of events that interrupted a month long rally in risky assets. Comments by Fed Reserve Chairman Ben Bernanke made investors fret that the flood of money might soon be tapering and investors quickly jumped out of riskier assets.

By CHRIS DIETERICH in New York, DANIEL INMAN in Hong Kong and CHARLES FORELLE in London
Updated May 23, 2013, 1:47 p.m. ET
Wall Street Journal

Stocks in the U.S. moderated losses, bucking a global selloff that began with a 7.3% plunge in Japan's stock market.

Markets around the world had been jostled by a confluence of events that interrupted a monthslong rally in risky assets. Thanks in large part to a flood of easy money from global central banks, investors piled into stocks—particularly Japanese stocks—and bought European bonds they once shunned.

But comments Wednesday by U.S. Federal Reserve Chairman Ben Bernanke and minutes from the Fed's recent policy meeting suggested that the Fed might start pulling back on its bond purchases sometime this year. That made investors fret that the flood might soon be tapering and dovetailed with weak Chinese manufacturing data to send the Nikkei tumbling. It fell 1,143.28 points to close at 14483.98, a drop of 7.3%, the worst decline by percentage since right after the March 2011 earthquake and tsunami.

After the tumult in Japan, investors jumped quickly out of riskier assets. Spanish and Italian government bonds weakened, as did more-speculative currencies like the South African rand. Havens such as German government bonds and the Swiss franc gained. Gold also rose.

As trading shifted to the U.S., however, investors were greeted by better-than-expected jobless claims, a rising pace of new-home sales and record new-home prices in April. As well, focus remained on a recent flurry of conflicting messages from the Federal Reserve, which sent U.S. stocks tumbling 0.5% on Wednesday.

On Thursday, the Dow Jones Industrial Average was down 45 points in early afternoon, after being down as many as 127 points shortly after the opening bell.

"There are a lot of folks underweight stocks in this rally and they are using this opportunity to buy instead of running for cover," said Wasif Latif, vice president of equity investments at USAA Investments in San Antonio. His firm manages $54 billion. "The market psychology remains a 'buy-on-the dip' approach, and there's a lot of momentum driving this market."

Before Thursday, the Nikkei was up 50% year to date, largely in anticipation of accelerating economic growth in Japan as a result of Bank of Japan stimulus measures and increased government spending.

Some investors said a pullback was to be expected following such big gains. "I assumed a correction was coming, but the movement was extremely violent," said Ryo Takebe, a 28-year-old retail investor who works at a chip-related manufacturing firm.

Many investors were focused on Wednesday's statements from Federal Reserve Chairman Ben Bernanke, who said the Fed's policy-making committee could start to taper off asset purchases—which had flooded the economy with money and contributed to rising markets—"in the next few" meetings should the U.S. labor market continue to improve.

"The Fed minutes are the most important thing," said Ian Winer, director of trading at Wedbush Securities. "Even a hint, as we got yesterday afternoon, of the Fed tapering purchases sent things into a tailspin."

Also stoking the selloff was data out of China pointing to the first contraction in the manufacturing sector of the world's second-largest economy in seven months.

Big losers in Japan were China-related companies, such as construction-equipment maker Komatsu Ltd., 6301.TO -7.00% which fell 7%, and those, such as real-estate developers and banks, that have benefited from low bond yields. Mr. Bernanke's comments caused bond yields in the U.S. and Japan to spike. Yields on the 10-year Japanese government bond briefly spiked to their highest level in more than a year.

The yen, meanwhile, which had weakened against the dollar during Japanese stocks' rise, strengthened sharply Thursday and was at ¥101.65 late morning in New York, from ¥103.57 in Asian morning trading.

"The upward pitch of the market, particularly since May 10, rang many alarm bells and frankly seemed to defy gravity," said Kenichi Hirano, a market adviser at Tachibana Securities.

The plunge in the Japanese stock market Thursday spilled into Europe, overshadowing moderately better economic data in the Continent. Bourses in Frankfurt, London, Paris and Milan slumped more than 2%.

Spanish and Italian government bonds weakened, as did more-speculative currencies like the South African rand. Havens such as German government bonds and the Swiss franc gained. Gold also rose.

Data out Thursday from the euro-zone purchasing managers' index, produced by Markit, showed that the currency area remains stuck in economic contraction—but that the pace of contraction is slowing. Markit said the composite output PMI was at 47.7 in May, up from 46.9 in April. It was hardly good news, but less bad than much of what the euro zone has seen recently.

In the foreign-exchange markets, the effect of Mr. Bernanke's comments was felt. Investors shifted out of a range of currency bets that had relied in part on Fed policy holding steady for longer.

Emerging-market currencies suffered. The South African rand weakened to a fresh four-year low against the dollar but then later strengthened after the country's central bank held rates steady. The Polish zloty fell to its weakest level against the euro since February 1.

"Emerging market foreign-exchange is in for a very tough time," said Kit Juckes, a macro strategist at Société Générale GLE.FR -3.87% in London, noting that when the Fed normalized policy in the late 1970s and in 1994, there were massive shifts in emerging-market currencies.

The European government bond markets showed similar patterns. Bonds sold by fiscally frail euro-zone countries fell Thursday while haven debt prices gained.

The yield on Italy's benchmark 10-year government bond climbed 0.08 percentage point to 3.99% while the yield on the corresponding Spanish government bond rose 0.07 percentage point to 4.24%.

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