* Weak Chinese factory, euro zone sentiment data hit global
* Bernanke's comments on reducing bond-buying weigh on
* Nikkei drops 7 pct, Wall Street down for second day
* Yen gains more than 2 pct vs dollar and euro
By Ryan Vlastelica
NEW YORK, May 23 Stock markets worldwide fell
sharply on Thursday as surprisingly weak data from China and
Europe raised worries about slow growth a day after U.S. Federal
Reserve chief Ben Bernanke broached the possibility of reducing
stimulus that has buoyed investor confidence.
Japanese shares were hit hardest in overnight action, with
the Nikkei losing 7.3 percent, its biggest one-day fall
in two years. Investors retreated to safe-haven currencies.
At the session peak, the yen rose more than 2 percent
against the dollar and the euro, which both lost 1 percent
against the Swiss franc , also seen as a safe
U.S. stocks were lower, but off the day's worst levels, with
the S&P 500 down 0.35 percent.
Chinese factory activity shrank for the first time in seven
months, adding to concerns that the world's second-biggest
economy had stalled. European factory sentiment dropped,
suggested that the euro zone's economy was likely to contract
again in the second quarter.
"Even though we were overdue for a correction, the Chinese
data certainly didn't help things. If it proves to be part of a
trend, that's very concerning for the global economy," said Eric
Green, senior portfolio manager at Penn Capital Management in
Philadelphia, which oversees $7 billion.
The data gave investors a reason to extend Wednesday's
sell-off, sparked after testimony from Bernanke that cast
uncertainty over when the Fed would begin to reduced stimulus.
European shares were down 1.9 percent, and MSCI's
world equity index lost 1.3 percent, though both
indices were off their lows.
Fed officials have started to talk more openly about pulling
back on stimulus that has held U.S. Treasury yields near record
lows, creating a favorable environment that has produced sharp
rallies in stocks and high-yield corporate bonds.
Bernanke said that if economic improvement continued, the
Fed "could in the next few meetings take a step down in our pace
of purchases," although Fed officials have been at pains to
stress that no action is likely for months.
The program is seen as a major contributor to the massive
equity gains that have taken indexes to record highs this year,
and many analysts worry that the U.S. economy is not strong
enough to continue outperforming without it.
"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
U.S. light crude oil, which is closely tied to the
pace of economic growth, fell 1.4 percent. The U.S. dollar index
fell 0.6 percent.
The Dow Jones industrial average was down 8.68
points, or 0.06 percent, at 15,298.49. The Standard & Poor's 500
Index was down 5.62 points, or 0.34 percent, at 1,649.73.
The Nasdaq Composite Index was down 6.53 points, or 0.19
percent, at 3,456.77.
The Euro STOXX 50 Volatility Index, Europe's widely
used measure of investor risk aversion, surged nearly 15 percent
to a three-week high. The CBOE Volatility Index rose 3
Concern the Fed will wind down its stimulus initially took
its toll on bonds, but investors' sales of equities caused money
to flow into safer government debt, leaving yields on U.S.
Treasuries and German Bunds down from their highs. The benchmark
10-year U.S. Treasury note was down 1.32 in price,
the yield at 2.0386 percent.
Investors expect the bond market will have to adjust to
changing Fed policy, and that suggests higher yields in the
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-neighbor 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."