Markets slump as investors dispose of risky assets

EQUITY MARKETS across the world fell sharply yesterday as investors took fright at the threat of nuclear meltdown in Japan and the biggest two-day sell-off in the country’s Nikkei index for 24 years.

Investors showed their anxiety by indiscriminately selling riskier assets and moving into perceived havens such as US and German government debt. Japanese equities fell 10.6 per cent, their third-worst drop in history, while German shares dropped more than 5 per cent at one stage.

In Dublin, the Iseq lost 2.6 per cent to close at 2,747, with nearly all stocks ending in negative territory. The Iseq’s most liquid stocks such as Ryanair and CRH were particularly hit as a major derisking of portfolios took place across Europe, according to traders in Dublin.

“The stock market has been remarkably resilient over the past two years. So have the US and global economies – and the US consumer. However, all of them may be about to face their greatest challenge as Japan’s disaster may be turning into an unmitigated catastrophe,” said Ed Yardeni, founder of Yardeni Research.

Atsushi Saito, president of the Tokyo stock exchange, appealed for calm after the panicked selling of Japanese shares.

Later, the US Federal Reserve held interest rates and stuck with its $600 billion treasury bond purchase programme, saying that the housing market remained depressed, even though the economy was on a firmer footing.

Many investors argued that shares, which have nearly doubled after a two-year rally, were due a correction and markets could drop further in the coming days. Equities recovered some ground as the day wore on without further bad news from Japan.

The FTSE Eurofirst 300 closed down 2.2 per cent while Germany’s Dax 30 fell 3.2 per cent, with airline Lufthansa and car-maker Porsche losing more than 5 per cent. The SP 500 was down 1.2 per cent in afternoon trade.

“I don’t think it is the end of the equity rally. But I don’t think it is the right moment to be buying equities either. Volatility has spiked,” said Jonathan Xiong of Mellon Capital Management in San Francisco.

Benchmark US treasuries and German bunds saw their yields fall by 0.06 and 0.09 percentage points, respectively, while investors bet that forecast interest rate hikes would be delayed in the euro zone and the UK.

European electricity and natural gas prices shot up as the market braced for the double impact of Germany’s decision to mothball one-third of its nuclear capacity and Japan’s utilities stepped up purchases of liquefied natural gas to offset atomic power.

German chancellor Angela Merkel wrongfooted traders by announcing a three-month closure of seven atomic plants built before 1980.

Carl Weinberg, chief economist at High Frequency Economics, warned that “this is a stew of unfavourable circumstances that is ripping the guts out of global equity markets in a way we have not seen since 1988”. – Copyright The Financial Times Limited 2011