Shares hit by stimulus fears; yen soars on BOJ inaction

NEW YORK Tue Jun 11, 2013 4:29pm EDT

1 of 6. A trader watches a screen on the floor at the New York Stock Exchange, June 10, 2013.

Credit: Reuters/Brendan McDermid

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

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

The yen soared, with the U.S. dollar down 3 percent and on pace for its worst daily performance since March, 2011 against the Japanese currency.

The BOJ decision sparked a further reversal of bets on stocks, emerging-market debt and other assets bolstered by accommodative monetary policies. Investors have become more nervous in recent weeks over when the U.S. Federal Reserve may slow its supportive measures.

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 last down 0.6 percent.

"A lot of what has fueled the rally in equity indexes has been a combination of improvement in earnings and the economy, but in the background there was always the idea that easy money was helping elevate asset prices," said Kevin Caron, market strategist at Stifel, Nicolaus & Co. in Florham Park, New Jersey.

"We are now hearing from various central banks it is possible that expectations for the future are needing to be dampened down a little," he said. "By not following through with more substantive easing, the BOJ adds to this, and weaker equity markets around the world are reflecting this unease."

The Dow Jones industrial average .DJI dropped 116.57 points, or 0.76 percent, to close at 15,122.02. The Standard & Poor's 500 Index .SPX fell 16.68 points, or 1.02 percent, to 1,626.13. The Nasdaq Composite Index .IXIC lost 36.82 points, or 1.06 percent, to 3,436.95.

European shares fell to six-week lows. The pan-European FTSEurofirst 300 index .FTEU3 closed down 1.2 percent at 1,179.57.

The selling spread across emerging economy 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 1.7 percent.

The dollar dropped 2.8 percent to 96.01 yen, having hit a session low of 95.60 yen, according to Reuters data. The euro fell 2.4 percent to 127.82 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.

Against the dollar, the euro rose 0.4 percent to $1.3310, while the U.S. dollar index .DXY slipped 0.7 percent to 81.060.

Oil prices slumped after the United States nearly doubled the estimate of its shale oil and as investors worried that central banks, following Japan's example, could begin to rein in their loose monetary policies.

The U.S. Energy Information Administration revised its estimate on domestic shale oil reserves to 58 billion barrels, up from 32 billion in 2011, as new drilling techniques unlocked deposits.

Brent crude dropped 99 cents to settle at $102.96 a barrel, while copper fell to a one-month low at $7,065 a metric ton. U.S. crude fell 39 cents to settle at $95.38.

Gold fell to a near three-week low and last traded at $1,378 an ounce.

The benchmark 10-year U.S. Treasury note was up 9/32, the yield at 2.1792 percent.

Treasury prices had earlier fallen, driving yields to 14-month highs as part of a global bond selloff after the BOJ decision. But the market pared its early losses on buying from bargain-minded investors and traders who wanted to close out their short positions, analysts said.

One trader cited talk that the dollar/yen's move back to the "95 handle" had prompted buying by a large hedge fund.

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.

(Additional reporting by Angela Moon, Leah Schnurr, Richard Leong, Rodrigo Campos and Julie Haviv; Editing by Dan Grebler)

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