Investors flee economic gloom, policy paralysis

NEW YORK, (Reuters) – Investors around the world  dumped stocks and commodities yesterday and rushed to the  security of cash and government bonds, hammering equity indexes  to their lowest levels of the year on fears of a spreading debt  crisis and slowing growth.

Worries the euro-zone debt crisis was spiraling out of  control sent blue chip European stocks to levels not seen since  markets recovered from the financial crisis in mid-2009.  Italian equities pushed further into bear market territory —  down nearly 30 percent since February.

Major U.S. indexes fell more than 4 percent, with the  technology-heavy Nasdaq down 5 percent, erasing gains for the  year as the broad-based S&P 500 entered a correction of more  than 10 percent from a peak in May.

Intense selling this week reflects frustration with  politicians to address pressing concerns over high public debt  levels in Europe and the United States as large industrial  economies show signs of running aground.

The euro zone’s blue chip Euro STOXX 50 index, which  measures the performance of 50 big European stocks, fell 3.4  percent to a two-year low, wiping out much of its gains since  the end of the financial crisis.

“The big catalyst was fear,” said Matt Rubin, director of  investment strategy at Neuberger Berman in New York, which  manages $199 billion in assets.

“People are selling in anticipation of a lousy jobs number  and a double-dip recession,” he said, referring to Friday’s  closely watched U.S. payrolls report, which is expected to show  another month of subpar growth in the labor market.

With investors caught in a perfect storm, officials around  the world moved to calm markets. The boldest step came from  Tokyo, where the government spent an estimated 1 trillion yen  ($13 billion) to stem the strength of its currency.

The yen-selling pushed the dollar up roughly 4 percent to a  session high of 80.25 yen on trading platform EBS, well off a  low of 76.29 set on Monday. The dollar traded on Thursday  afternoon at 79.08 yen, up 2.6 percent on the day, while the  euro gained 1 percent to 111.70 yen.

The Japanese intervention came a day after Switzerland  unexpectedly cut rates to weaken the franc, which has spiked in  recent days as investors sought safe havens. The currency edged  slightly higher in New York trade on Thursday.

Even gold, which has raced to a series of highs near $1,700  an ounce amid the gathering uncertainty, fell as deepening  losses on Wall Street prompted investors to sell the metal to  raise cash.

The exodus from stocks pushed the broad Standard & Poor’s  500 Index down nearly 5 percent, while the clamor for  safe-haven investments drove the yield on the 10-year U.S.  Treasury note below 2.5 percent, the lowest since early  November 2010.

The CBOE volatility index, or VIX, known as Wall Street’s  fear gauge, jumped 35.4 percent to 31.7, its highest in more  than a year. The move was the biggest jump since February 2007,  which came during the U.S. subprime mortgage meltdown.

The Dow Jones industrial average dropped 512.76 points, or  4.31 percent, to end at 11,383.68. The Standard & Poor’s 500  Index fell 60.27 points, or 4.78 percent, to 1,200.07. The  Nasdaq Composite Index lost 136.68 points, or 5.08 percent, to  2,556.39.

The MSCI world equity index was down 4.3 percent for the  day, its largest daily fall in over two years, and hit a fresh  2011 low. European stocks lost 3.3 percent.

Safe-haven assets like the Swiss franc, the yen and gold  have spiked this week on investor fears that governments around  the world are planning spending cuts at a time of slowing  global economic growth.