GLOBAL MARKETS-Gold soars, stocks sink as data roils markets

Thu Aug 18, 2011 3:38pm EDT

* Spot gold touches new record high on recession fears * Global equities tumble after U.S. data sours investors * Safe-haven debt, dollar gain as risk appetite evaporates * Oil slides as slower global growth prospects dim demand (Updates prices)

By Herbert Lash

NEW YORK Aug 18 (Reuters) - Renewed jitters over Europe's debt crisis and a raft of weak U.S. economic data sparked a rout in global equities on Thursday while driving investors to the safety of gold and U.S. government bonds.

Spot gold prices and the yield on benchmark U.S., British and German 10-year government debt set fresh records as investors dumped stocks and other riskier assets to rush into safe-haven investments for their perceived security.

The numbers spelled mayhem -- stocks on Wall Street plunged about 5 percent -- but they managed to stay above 2011 lows set last week and most asset prices pulled back from session lows.

"For the moment, it is hard to see the markets breaking decisively the spell of uncertainty created by global growth fears, constrained monetary and fiscal policy choices and the lingering European debt crisis," said Vassili Serebriakov, currency strategist at Wells Fargo in New York.

A drop in factory activity in the U.S. Mid-Atlantic region to the lowest level since March 2009 unnerved investors, as the data from the Philadelphia Federal Reserve Bank is viewed as a forward-looking indicator of national manufacturing.

An unexpected fall in existing U.S. home sales in July and a greater-than-expected rise in new claims for jobless benefits in the latest week added to growing fears that the U.S. economic recovery could be derailed.

Aversion to risk swept financial markets. Corporate bonds, industrial commodities and higher-yielding currencies slid, and assets viewed as safe havens, such as gold, government bonds and the dollar, gained.

European equities suffered their biggest daily slide in 2-1/2 years. The FTSEurofirst 300 .FTEU3 index of leading European shares fell 4.8 percent to close at 925.19 points, its biggest one-day percentage drop since March 2009.

"The market is beginning to price in a recession. The Philadelphia Fed number was an absolute abomination," said Michael Hewson, market analyst at CMC Markets in London.

"Until we get some clear idea of how policy-makers are going to deal with euro-zone sovereign debt problems, it's not getting to get any better."

On Wall Street, the three major U.S. stock indexes lost 4 percent to 5 percent. Global stocks, as measured by MSCI's all-country world equity index .MIWD00000PUS, tumbled 4.4 percent.

WORRIES ABOUT EUROPEAN BANKS

U.S. stocks plummeted in sync with bank shares after The Wall Street Journal reported that regulators were intensifying their review of the U.S. units of European banks. [ID:nL5E7JI0Q]

The sell-off "is rooted in the European banking system," said Jack de Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire.

"It reflects continued concern that sovereign debt issues indicate we're going to have to bail out all those banks again. And if there's stress in major European banks, it will affect U.S. banks, too."

The president of the New York Federal Reserve Bank, William Dudley, said the U.S. central bank is treating foreign banks the same as their U.S. peers.

U.S. equities, as measured by the S&P 500, were still above the year's lows set early last week.

The Dow Jones industrial average .DJI was down 477.72 points, or 4.19 percent, at 10,932.49. The Standard & Poor's 500 Index .SPX was down 59.03 points, or 4.94 percent, at 1,134.86. The Nasdaq Composite Index .IXIC was down 140.27 points, or 5.59 percent, at 2,371.21.

In Europe, German shares lost the most, with traders citing the effects of a short-selling ban on financial stocks in other parts of Europe and intensifying worries about politicians' lack of a plan to address the euro-zone sovereign debt crisis. [ID:nL5E7JI3UN]

The European banking sector, exposed to the euro-zone debt crisis, fell 6.7 percent and is down 29.8 percent this year.

U.S. Treasuries prices soared, with the yield of the benchmark 10-year note falling below 2.0 percent for the first time as investors snapped up the government bonds on fears of a global economic slowdown. [ID:nN1E77H0K3].

Morgan Stanley told investors that the United States and the euro zone are "dangerously close" to recession, even though it said that was not its base scenario. [ID:nL3E7JI1LM]

RISK APPETITE DISAPPEARS

The benchmark 10-year note US10YT=RR shot up 23/32 in price to yield 2.09 percent, after slumping to a record low of 1.97 percent.

Yields on British 10-year gilts GB10YT=RR fell to an all-time low of 2.238 percent and 10-year German debt DE10YT=TWEB fell to 2.028 percent.

Gold rallied to its second record high in a week. Spot gold XAU= hit a record $1,825.99, although it is still off its inflation-adjusted peak above $2,000 struck in 1980.

Short-term money markets showed further signs of bank stress emanating from Europe's fiscal strains. The benchmark for unsecured dollar loans between banks, three-month Libor, rose to its highest in 4-1/2 months, the latest in recent peaks.

Investors also pulled back over the last week from the commercial paper market, a key source of short-term funding for banks and businesses. These strains have contributed to the stock sell-off and the rush into gold and government bonds.

The U.S. dollar and yen firmed as global growth anxiety and worries about European banks drove investors to the relative safety of both currencies.[ID:nN1E77H0EL]

The ICE Futures dollar index .DXY rose 0.8 percent to 74.232 while the euro fell 0.7 percent to $1.43250 EUR=EBS.

"We have much lower risk appetite today and that's why we're seeing the dollar strengthen," said Ray Attrill, senior currency strategist, at BNP Paribas in New York.

Crude prices tumbled on the prospect of declining demand.

Brent crude LCOc1 slid $3.61 to end at $106.99 a barrel, breaking below the 200-day moving average, a key technical indicator closely watched by traders.

U.S. crude oil tumbled $5.20, or 5.9 percent, to settle at $82.38 a barrel, and its discount to Brent widened to more than $24 a barrel. (Reporting by Rodrigo Campos, Gertrude Chavez-Dreyfuss and Karen Brettell in New York; Anirban Nag, Atul Prakash and Ikuko Kurahone in London; Writing by Herbert Lash, Editing by Leslie Adler and Jan Paschal)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.