* US stock indexes fall 2 pct to 3 pct, turn lower for 2010
* Dollar hits 15-yr low vs yen; gains vs other currencies
* Oil down 1.2 pct; government bonds rally
(Updates with European markets' close)
By Walter Brandimarte
NEW YORK, Aug 11 (Reuters) - Fear returned to global
markets with stocks sinking on Wednesday and the dollar making
its biggest one-day gain in nearly two years against most
major currencies on renewed worries of an economic slowdown in
China and the United States.
Even as the dollar strengthened across the board, the
Japanese yen hit a 15-year high against the greenback as the
yield spreads of U.S. Treasury debt over those of Japanese
government bonds narrowed.
Commodity prices fell, with oil prices sliding more than
$2 to below $79 per barrel, on fears that a global economic
slowdown would reduce demand for raw materials.
The three major U.S. stock indexes slid 2 percent to 3
percent, turning negative once more for the year so far.
U.S. Treasuries' yields dropped to record lows one day
after the Fed announced it would use cash from maturing
mortgage bonds it holds to buy more government debt,
maintaining the current level of monetary stimulus. See
[].
Some investors saw the measure as a sign that policy
makers want to support financial markets while the economy
goes through a possible pause in growth. []
"I don't think that we are in for a major correction for
the equity market," said Klaus Wiener, head of research at
Generali Investments in London.
"The Fed is willing to support the economy. If the economy
slows but does not fall into recession as I expect, then
market confidence in the economy could improve again," he
added.
But that strategy, at least for now, seemed to have
backfired.
"If one of the Fed's goals in yesterday's statement was to
instill confidence in the market that they will do anything to
make things better, they accomplished the exact opposite in
that today we are even more worried about economic growth,"
Peter Boockvar, equity strategist at Miller Tabak & Co in New
York, said in a note to clients.
EUROPEAN STOCK INDEX AT 3-WEEK LOW
Adding to investors' woes was data showing a slowdown in
Chinese investment and factory output growth, coupled with a
Bank of England's downgrade of its growth forecast and a
dovish tone from its governor, Mervyn King.
The MSCI All-Country World index <.MIWD00000PUS> fell 2.7
percent, while the FTSEurofirst 300 index <> of top
European shares tumbled 2 percent to end at 1,040.87 -- a
three-week closing low.
Banking and commodity shares led European markets lower,with the STOXX Europe 600 banking index <.SX7P> falling 3.4
percent.
On Wall Street at midday, the Dow Jones industrial average
<> lost 243.32 points, or 2.29 percent, to 10,400.93,
while the Standard & Poor's 500 Index <.SPX> declined 30.76
points, or 2.74 percent, to 1,090.30. The Nasdaq Composite
Index <> was down 70.78 points, or 3.11 percent, at
2,206.39.
Yields on U.S. Treasuries fell, with the two-year note's
yield <US2YT=RR> touching a record low of 0.493 percent
earlier in the session.
The benchmark 10-year note <US10YT=RR> shot up 19/32 in
price, with the yield at 2.703 percent.
"The fall in U.S. yields is a barometer of the cyclical
position of the U.S. economy," said Adam Cole, head of
currency strategy at RBC Capital Markets.
"The market's reaction is that if the U.S. economy is
slowing materially, it will not be in isolation, and it has
therefore responded by selling risk."
YEN SHINES
The dollar gained against a basket of major currencies as
investors became more averse to risk, with the U.S. Dollar
Index <.DXY> up 1.84 percent at 82.280.
The euro <EUR=> was down 2.13 percent at $1.2896.
Against the Japanese yen <JPY=>, however, the greenback
weakened 0.19 percent to 85.24 as declining U.S. Treasury
yields prompted Japanese funds, heavily invested in
dollar-denominated Treasuries, to repatriate profits.
The dollar had earlier dropped to 84.72 yen <JPY=> -- a
15-year low -- on the electronic trading platform EBS. The
record low in dollar/yen was hit in April 1995 around 79.75
yen.
Japanese Finance Minister Yoshihiko Noda said he was
closely watching forex markets, but analysts doubted his
rhetoric would escalate into currency intervention to weaken
the yen. []
U.S. crude oil <CLc1> fell $2.15, or 2.68 percent, to
$78.10 a barrel. Crude oil futuers prices were also pressured
by a government inventory report showing refined products
stockpiles rose more than expected last week, even though
refiners reduced capacity more than 3 percent.
(Reporting and writing by Walter Brandimarte; Additional
reporting by Richard Leong, Angela Moon and Wanfeng Zhou;
Editing by Jan Paschal)
