LONDON (Reuters) - Investors shunned risky financial assets on Thursday amid fears of a U.S. recession, sending stocks lower for a second session in the new year, but safe-haven flows helped propel gold to a fresh high.
Wall Street looked set to open lower following a 0.2 percent fall in MSCI’s main world stock index and a 0.7 percent drop in European shares. MSCI’s Asia Pacific stocks excluding Japan slid 1.2 percent.
With caution on the rise, the yen gained ground as investors unwound risky trades usually funded by the low-yielding Japanese currency.
U.S. crude oil, meanwhile, hovered near its peak of $100 a barrel at $99.77, underpinned by a struggling dollar and expectations of another fall in U.S. fuel stocks.
Already hurt by concerns that a U.S. credit crunch would hit the world’s biggest economy, investor confidence was further shaken after Wednesday’s data showed U.S. factory production shrank in December for the first time in nearly a year.
“On the one side, you have economic data pointing lower, and on the other side record oil prices that raise concerns over inflation, a difficult situation for the Fed,” said Jean-Marc Lucas, an economist at BNP Paribas in Paris.
“The data fuel the stagflation theme, but we think that recession risks are much greater than inflation risks.”
Federal Reserve policymakers had said that big interest rates cuts may be required to help cushion the U.S. economy from the credit woes, minutes of the Fed’s December 11 policy meeting showed.
Against a backdrop of growing risk aversion, investors snapped up gold, seen as a safe-haven investment and an inflation hedge, driving the precious metal to $868 an ounce for the first time ever.
The Japanese yen also benefitted from the cautious mood, rising to fresh five-week highs against the dollar and euro.
Investors tend to sell the low-yielding currency to fund purchases of riskier but higher-yielding assets and reverse those trades when risk appetite drops.
“The yen is well-bid as there is a combination of dollar weakness and market risk-aversion and the yen wins on both,” said Adam Cole, global head of FX strategy at RBC Capital Markets.
The dollar fell to a low near 108.20 yen, a level last seen in late November, while the euro dipped below 160 yen for the first time since November 27.
Against a basket of currencies, the dollar reversed early gains to be down 0.3 percent at 75.751. The euro climbed to a one-month high of about $1.4780.
“We’ve got the worst of worlds for the dollar with cyclical weakness in the U.S. economy and the expectation of further cuts from the Fed, both of which spell trouble for the dollar,” said David Pais, FX strategist at Citi.
Euro zone government bond prices rose with equities on the retreat, pushing yields lower. The 10-year Bund yield slipped 1.9 basis points to 4.194 percent.