Fearful investors dump stocks, bonds for cash

By Clive McKeef and Natsuko Waki

NEW YORK/LONDON (Reuters) - Stocks plunged in early Friday trading in line with markets in Europe and Asia but then recovered some ground, with investors looking to an imminent G7 finance ministers meeting in Washington, D.C. for a further policy response to the deepening global credit crisis.

The MSCI world equity index fell more than 4.0 percent at one point to a five-year low, losing a fifth of its value this month alone. The index has lost 43 percent since January, on track for its worst weekly, monthly and yearly performance in 20 years.

Bond yields in the United States and Europe also rose as the worsening crisis pushed investors into selling in a mad scramble to turn any investment they had into cash.

The U.S. dollar and gold were the main beneficiaries of falling world financial asset prices, as investors moved out of riskier markets into cash in U.S. dollars and safe havens.

The Dow Jones Industrial Average fell 8.0 percent minutes after the opening bell and the S&P 500 was off more than 7.0 percent, before cutting the bulk of those losses.

The Dow Jones industrial average was down 1.31 percent, at 8,568.67 by midmorning, while the Standard & Poor's 500 Index was down 1.27 percent, at 898.31.

"We are extremely oversold right now. Everybody was looking for a hard, hard sell-off at the open and we got it. So this is a classic come-back from a sell-off at the open," said Angel Mata, managing director of listed equity trading at Stifel Nicolaus Capital Markets in Baltimore.

"This is a psychological oversold bounce. Technicals have nothing to do with this."

U.S. Treasuries mostly fell, with only short-term Treasury bills, considered a cash equivalent, seeing any demand.

"We are not used to seeing stocks implode and Treasuries sell off (at the same time)," said Josh Stiles, senior bond strategist at IDEAglobal, "but people are saying they don't even want to be in Treasuries now, they need the cash."

"It is hard to get new buyers when everyone is trying to raise cash," he said.

The benchmark 10-year U.S. Treasury note was trading 26/32 lower in price for a yield of 3.88 percent from 3.78 percent late on Thursday, while the 2-year Treasury note was 7/32 lower for a yield of 1.65 percent from 1.53 percent.

The only buying of debt was on the very short end of the Treasury curve, where one-month T-bill yields were trading all the way down near 0.07 percent.

Tensions persisted in the money market, where the cost of borrowing dollars for three months rose to 4.81875 percent at the fixing in London.

In currency markets, increased risk aversion left the yen as the currency of choice, with the euro earlier falling to a three-year low of 132.80 yen and the dollar hitting a 6-1/2-month low of 97.92 yen.