Stocks and oil slump as debt woes spark risk fears

By Herbert Lash

NEW YORK (BestGrowthStock) – Global stocks and commodity prices fell sharply on Tuesday on fears that euro zone banking troubles could spread to dampen the world recovery and as tensions over the two Koreas added to investors’ unease.

Oil fell below $68 a barrel at one point and gold prices shot above $1,200 an ounce as investors fled riskier assets to the safety of bullion, and the U.S. and Japanese currencies.

The euro fell (Read more about the trembling euro. ) to an 8-1/2-year low against the yen and neared a four-year trough versus the dollar after the weekend takeover of a small Spanish savings bank, CajaSur, sparked worries the euro zone sovereign debt crisis is spreading.

“People are worried the euro zone crisis will spread and derail the global economic recovery,” said Carsten Fritsch, analyst at Commerzbank.

There were signs of stress in credit markets. Dollar interbank lending rates rose and were seen pushing higher as the debt crisis made banks wary of lending to European peers.

Other measures of stress in money markets were at their highest since the financial system emerged from the subprime mortgage crisis a little more than a year ago.

“It’s a run for dollar liquidity. Everybody wants to move out of the euro and wants dollars, so the problem is access to dollar liquidity is strained,” said Patrick Jacq, a strategist at BNP Paribas.

On Wall Street, the benchmark S&P 500 touched its lowest point since early November 2009 and was trading down about 13 percent from its closing high in late April. Some traders said they were looking for a 20 percent drop from that April peak, which would mark a move into a bear market.

Asia stocks fell to multi-month lows and European shares closed at their lowest level in nearly nine months, with banks pressured by concerns over the health of the financial sector.

Global stocks as measured by MSCI’s all-country world index (.MIWD00000PUS: ) fell 2.6 percent to their lowest since August 2009, while the more volatile emerging stocks index (.MSCIEF: ) dropped 4.2 percent to 8-month lows.

Spanish banks Banco Santander (SAN.MC: ) and BBVA (BBVA.MC: ) fell 3.9 percent and 4.5 percent, while Credit Agricole (CAGR.PA: ) fell 6.7 percent and Lloyds (LLOY.L: ) shed 5 percent.

“What’s driving the markets so badly at the moment is concern about European banking risk, with a focus on savings banks in Spain after the restructuring of CajaSur,” said Bob Parker, vice chairman of asset management at Credit Suisse.

The pan-European FTSEurofirst 300 (.FTEU3: ) index fell 2.4 percent to end at 949.87 points, its lowest close since early September 2009.

At 12:30 p.m., the Dow Jones industrial average (.DJI: ) was down 180.77 points, or 1.80 percent, at 9,885.80. The Standard & Poor’s 500 Index (.SPX: ) was down 18.50 points, or 1.72 percent, at 1,055.15. The Nasdaq Composite Index (.IXIC: ) was down 38.67 points, or 1.75 percent, at 2,174.88.

A rise of geopolitical tensions between the two Koreas after North Korean leader Kim Jong-il ordered his military to go on a combat footing exacerbated an already nervous market.

“We still have all of the euro zone fears, and there are increased tensions between North and South Korea,” said Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco.

London interbank offered rates for three-month dollars fixed at a fresh 10-month high at 0.53625 percent, according to the latest daily fixings by the British Bankers’ Association.

U.S. Treasuries climbed on the flight to safety bid.

The benchmark 10-year U.S. Treasury note was up 16/32 in price, pushing its yield down to 3.14 percent, near a year low.

Bank of America Merrill Lynch cut its oil demand growth forecasts for 2010 to 1.5 million barrels per day from 2 mbpd due to anticipated slower global economic growth in the second half of the year.

U.S. light sweet crude oil fell $1.93 to $68.28 a barrel.

The dollar was up against a basket of major currencies, with the U.S. Dollar Index (.DXY: ) up 0.84 percent at 86.932.

The euro was down 0.63 percent at $1.2273, and against the yen, the dollar was down 0.38 percent at 89.79 yen.

Spot gold prices rose $6.90 to $1,198.40 an ounce, after earlier rising to $1,200.15.

The 19-commodity Reuters-Jefferies CRB index (.CRB: ) fell almost 2 percent to its lowest level since early last September. Copper futures lost over 4 percent.

Asia stocks fell to multi-month lows on fears that Europe’s sovereign debt woes will trigger a renewed crisis among regional banks.

MSCI’s broad measure of Asia-Pacific shares outside of Japan (.MIAPJ0000PUS: ) tumbled 4.3 percent to touch its lowest in 9 months. Japan’s Nikkei average (.N225: ) fell 3.1 percent to mark a six-month closing low below a key support level at 9,500.

Stock Market Research

(Reporting by Wanfeng Zhou, Chris Reese in New York; Emelia Sithole-Matarise, Emma Farge, Brian Gorman in London; writing by Herbert Lash; Editing by Leslie Adler)

Stocks and oil slump as debt woes spark risk fears