Central bank fears hit shares, commodities; yen soars

Investors sold off stocks and commodities worldwide on fears that major central banks are slowing down with their bond buying program. The prospect of reducing stimulus has halted a rally that took stocks to all-time highs. The central banks have caused a great deal volatility and have pushed assets beyond the fundamentals.

By Wanfeng Zhou and David Gaffen
Tue Jun 11, 2013 12:12pm EDT
Reuters

(Reuters) - Investors sold off stocks and commodities worldwide on Tuesday, unnerved by fears that major central banks are cooling in their commitment to pumping money into the economy to spur recovery.

But Wall Street stocks were well off their lows by midday as investors took earlier dips in the market as a chance to buy.

The decline was initially triggered in Tokyo when the Bank of Japan elected not to take any fresh measures to tackle rising government bond yields that threaten to thwart its $1.4 trillion stimulus program.

That news sparked a further reversal of bets on stocks, emerging-market debt and other assets bolstered by accommodative monetary policies. The yen soared, sending the dollar and euro down about 2 percent earlier.

The prospect of reduced stimulus has halted a rally that took U.S. indexes to all-time highs and the MSCI All-Country World Index .MIWD00000PUS to a five-year peak. The MSCI index was down 0.4 percent, reversing some of the day's losses.

"Central banks have pushed many assets beyond the fundamentals and created a great deal of volatility," said Michael O'Rourke, chief market strategist at Jones Trading in Greenwich, Connecticut. "Nobody really has an idea where the unwinding stops."

The selling spread across emerging shares as well, sending MSCI's benchmark index .MSCIEF to a nine-month low and extending losses caused by political tensions in Turkey and worries about China's slowing economy. The index was last down 1.6 percent.

European shares fell to six-weeks lows. The pan-European FTSEurofirst 300 index .FTEU3 provisionally closed down 1.2 percent at 1,179.40.

The Dow Jones industrial average .DJI dropped 7.52 points, or 0.05 percent, to 15,231.07. The Standard & Poor's 500 Index .SPX fell 4.49 points, or 0.27 percent, to 1,638.32. The Nasdaq Composite Index .IXIC declined 11.43 points, or 0.33 percent, to 3,462.33.

The dollar dropped 1.7 percent to 97.11 yen, having hit a session low of 96.47 yen, according to Reuters data. The euro fell 1.6 percent to 128.70 yen.

The BOJ held off on new measures on Tuesday, arguing that bond markets had stabilized. While BOJ Governor Haruhiko Kuroda did subsequently try to reassure the markets the central bank would consider fresh steps if yields spiked again in the future, the decision rattled many foreign investors.

"Headed into the meeting there was some hope they would extend the lending terms and they disappointed on that end," said Vassili Serebriakov, foreign exchange strategist at Wells Fargo in New York.

Serebriakov said the yen also rallied as a selloff in emerging-market currencies forced investors to buy back the Japanese currency. Many investments in these currencies were funded in yen, which can be borrowed at interest rates that are among the lowest in the world.

The euro rose 0.1 percent to $1.3267, while the U.S. dollar index .DXY slipped 0.3 percent to 81.383.

Brent crude dropped $1.49 to $102.46 a barrel, while copper fell to a one-month low at $7,065 a tonne. U.S. crude fell 90 cents to $94.87.

Gold was down 1 percent, close to a three-week low at $1,376 an ounce.

Debt investors pulled out of some of the riskiest assets in the euro area. Greek 10-year bond yields suffered their worst daily loss over a year, jumping a point to stand at 10.66 percent, and Spain's 10-year bond rose to 4.72 percent from 4.60 percent.

The selling in riskier markets did not provide any succor for safe-haven government debt, however. U.S. Treasury yields touched their highest levels in 14 months, with the benchmark 10-year note rising to 2.26 percent. The yield on safe-haven German 10-year bonds rose 7 basis points to 1.62 percent.

The benchmark 10-year U.S. Treasury note was last down 4/32, with the yield at 2.2279 percent.

Japan's Nikkei index closed down 1.5 percent .N225, though this followed Monday's 4.9 percent gain, while MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS tumbled 1.1 percent to hit 6-1/2-month lows.

Traders also noted nervousness about a German Constitutional Court hearing on the legality of the European Central Bank's bond-buying scheme, which added to long-running fears over the U.S. Federal Reserve winding down its stimulus.

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