* Signs Fed could taper bond-buying soon trigger share
* Weak Chinese factory, euro zone sentiment data add to
* Nikkei drops 7.3 pct, Wall Street opens lower
* Yen gains over 2 pct against dollar and euro
By Richard Hubbard
LONDON, May 22 World stocks fell and measures of
investor risk aversion surged on Thursday on signs the U.S.
central bank may soon start scaling back the support measures
that have been driving global assets higher.
Unexpected weakness in China's economy further fuelled the
sell-off, which sent Japanese shares diving to their biggest
one-day fall in two years, while data suggesting the euro zone
economy shrank again in the second quarter also hit confidence.
"This is a critical period now for the markets. Investors
have to adjust for the fact that the Fed's quantitative easing
is not going to support the equity markets for an unlimited
period," said Nick Beecroft, senior market analyst at Saxo
MSCI's world equity index lost 1.7 percent
on Wednesday, over one-tenth of this year's gain and on course
for its biggest daily fall of the year.
Stocks have soared as a wall of central bank money has
coursed around the global financial system seeking returns. The
prospect of the world's most important central bank slowly
turning the taps off could mark a profound turning point,
although its officials have been at pains to stress that no
action is likely for months yet.
Shares began to reel late on Wednesday after Federal Reserve
chief Ben Bernanke told Congress that if economic improvement
continued, the Fed "could in the next few meetings take a step
down in our pace of purchases".
The selloff extended to Wall Street, which opened broadly
lower for a second day after Japan's main Nikkei share index
slumped 7.3 percent and European shares slid
from a nearly five-year high hit on Wednesday.
The Euro STOXX 50 Volatility Index, Europe's widely
used measure of investor risk aversion, surged 18 percent to a
three-week high. The CBOE Volatility Index, or VIX,
meanwhile jumped 8 percent in early New York trade indicating
growing anxiety about the outlook for stocks.
The twin fears about global growth and the steady withdrawal
of U.S. stimulus sent oil prices lower, and hit copper
and other industrial metals.
Concern the Fed will wind down its stimulus initially took
its toll on bonds, but the scale of investors' sales of equities
saw money flow into the safest government debt, driving yields
on U.S. Treasuries and German Bunds down from their highs.
Demand for riskier euro zone debt softened although bonds
remained underpinned by expectations the European Central Bank
may yet ease monetary policy further. That would contrast with
any tightening by the Fed but follow a massive stimulus package
launched by the Bank of Japan.
"Whilst a slowing of QE is possible in a few months we can't
help (but) think that the Fed could be forced to restart its QE
in a beggar-thy-neighbour environment where central banks in
most parts of the developed world are still largely on an easing
bias in order to steal a share of the global GDP," Jim Reid,
strategist at Deutsche Bank said in a research note.
"We think QE or derivations thereof will be around for many
years to come."