GLOBAL MARKETS-Asian shares hit 2-yr high after Fed signals gradual tightening
* Fed policymakers support gradual reduction in balance sheet
* Global stock index falls, S&P 500 dips
* China's first domestic bond default creates jitters
* Signs of progress in diplomatic attempts to ease tensions surrounding Ukraine
* Fannie, Freddie shares drop after U.S. Senate plan
By Caroline Valetkevitch
NEW YORK, March 12 Global stock indexes declined for a fourth day and copper dipped to near four-year lows before rebounding on Wednesday as increasing concern about China's economic slowdown unnerved investors.
The concerns over China also pressured the Chilean peso and other currencies closely linked to commodities markets, while increasing investor appetite for safe-haven assets boosted U.S. government bonds and gold.
The moves follow China's first domestic bond default, which has raised concerns about a possible unraveling of the many loan deals which have used the metal as collateral.
Chinese firms that have difficulty raising loans have often bought copper as security for funds they borrow, but the 14 percent drop in copper's value this year is making banks more wary about the practice.
Data, including China's recent weak export numbers, has underscored worries that the world's second-largest economy is slowing.
"China has been a concern with its economic data which have been on the softer side. We have been weak with commodity currencies so far this week," said Dean Popplewell, chief currency strategist at Oanda.
Copper on the London Metal Exchange slid to a session low of $6,376.25 a tonne, its weakest level since July 2010, before recovering to end at $6,505, up 0.5 percent from Tuesday's close. Three-month LME copper has shed more than 11 percent this year, including a 2.6 percent drop on Tuesday.
"Most people are still cautious so we can't expect a quick rebound," said Andrey Kryuchenkov, analyst at VTB Capital. "On a fundamental point of view we have to wait and see in the second quarter how China stimulates its economy."
On Wall Street, the Dow Jones industrial average fell 28.47 points or 0.17 percent, to 16,322.78, the S&P 500 lost 2.28 points or 0.12 percent, to 1,865.35 and the Nasdaq Composite added 9.206 points or 0.21 percent, to 4,316.394.
Signs of progress in diplomatic attempts to ease tensions surrounding Ukraine helped equities pare earlier declines.
U.S. Secretary of State John Kerry will meet with his Russian counterpart, Sergei Lavrov, in London on Friday ahead of a referendum Sunday on whether the Ukraine's Crimean peninsula will join Russia.
"People are just kind of reassessing, they are looking at that headline and thinking maybe it is not going to turn out to be a disaster in Russia and Ukraine," said Ken Polcari, director of the NYSE floor division at O'Neil Securities in New York.
Shares of Fannie Mae dropped 9.4 percent to $3.65 and shares of Freddie Mac were down 13.6 percent at $3.48 after the leaders of the Senate Banking Committee on Tuesday announced an agreement on legislation to wind down the government-owned mortgage financiers.
The yield premiums on Fannie Mae and Freddie Mac bonds over Treasuries shrank broadly on the view the Senate plan would assure the government's guarantee of the companies' existing debt. For example, the yield gap between the five-year Fannie Mae note due February 2019 over five-year Treasuries narrowed 0.005 percentage point to about 0.15 percentage point.
In Europe, shares closed down 1.0 percent, while an index of global stocks was down 0.6 percent. Miners and other stocks sensitive to global growth trends came under pressure.
In the foreign exchange market, emerging market currencies fell, partly on investor nervousness over China's economy.
The Chilean peso fell to near five-year lows on a deepening sell-off in copper in Asian trading. Chile, a major copper exporter, saw its currency last trade down 0.3 percent versus the dollar at 537.32 pesos.
The Aussie was near flat after falling earlier in the session.
Oil prices declined, with Brent crude down 59 cents at $107.96 and U.S. oil futures down $2.18 at $97.85.
MOVE TO SAFE-HAVEN AREAS
U.S. Treasuries prices rose in safe-haven bidding on worries over the health of China's economy. They extended gains after a strong 10-year Treasury note auction.
The 10-year U.S. Treasury note last traded up 10/32 in price to yield 2.726 percent, compared with a yield of 2.766 percent late on Tuesday. Bond yields move inversely to their prices.
Spot gold rose as much as 1.4 percent in earlier trade to its highest level since Sept. 19 at $1,368.40 an ounce and was last up 1.2 percent at $1,365.50.
CHINA IN FOCUS
Economists are concerned that recent moves by Beijing to stamp out speculation on its rising currency and overly easy lending may have overshot and will damage China's economy.
The worries are adding to broader strains on emerging markets as they try to cope with shifts in global attitudes while recovering economies such as the United States begin to phase out the cheap money churned out in recent years.
Reuters reported that China's central bank is prepared to loosen monetary policy if economic growth slows further by cutting the amount of cash that banks must keep as reserves. This was a positive sign for markets, but also a possible indication of Beijing's growing nervousness.
Citing sources involved in internal policy discussions, the report said an easing would happen if growth slips below 7.5 percent, and would be on top of money market operations and currency intervention through state banks that traders say have already loosened monetary conditions.
* Fed policymakers support gradual reduction in balance sheet
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