RTRS: GLOBAL MARKETS - Stocks drop despite global rate cut, gold rises
By Herbert Lash
NEW YORK (Reuters) - Panic selling again swept global equity markets on Wednesday after a coordinated worldwide cut in interest rates failed to quell a drumbeat of fears over a global recession, with investors charging into gold and other safe havens.
U.S. and European stock and government debt markets were extremely volatile. U.S. stock indexes see-sawed wildly and U.S. benchmark Treasury yields marked their biggest single-day rise in more than a decade.
An index known as Wall Street's fear gauge, the Chicago Board Options Exchange Volatility Index, soared as much as 10 percent to a record intraday high. An upward spike in the VIX often occurs when equity markets suffer steep losses.
European shares sank to a near five-year closing low, and overnight interbank lending rates in Europe fell on the coordinated central bank rate cuts. But the cost of borrowing longer term remained high, reflecting a reluctance of banks to lend.
Oil prices fell as concerns about the impact of the global financial crisis on demand and rising U.S. inventories outweighed the move by central banks to cut rates.
Investors initially warmed to the one-half percentage point cut in interest rates by the U.S. Federal Reserve, the European Central Bank, the Bank of England and other central banks in the first coordinated move since the Sept. 11 attacks of 2001.
But confidence was short-lived as rallies on Wall Street failed. Short-dated euro zone government bonds rallied and gold held onto strong gains as investors fled to safe-havens.
"Markets around the world are feeling the impact of distressed portfolio liquidations, especially by hedge funds, following weeks of poor performance and loss of leverage capacity," Mohamed el-Erian, chief executive at top bond fund Pacific Investment Management Co., told Reuters.
The yen surged to its highest level in three years against the euro as fears widened that the coordinated rate cut effort may not be sufficient to thaw credit markets.
The benchmark FTSEurofirst 300 index of top European shares, after falling nearly 8 percent in early trade, recouped most of its losses after the rate cuts only to slide anew.
Wall Street performed almost the same, with the three major indexes whipping between declines and gains of as much as 2 percent before all closing lower.
"It shows lack of confidence in the effect of the rate cut this morning. People all day were trying to digest how effective it would be and at the end of the day they decided it would be safer to sell," said Giri Cherukuri, head trader at OakBrook Investments LLC, in Lisle, Illinois.
The Dow Jones industrial average closed down 189.01 points, or 2 percent, at 9,258.10. The Standard & Poor's 500 Index fell 11.29 points, or 1.13 percent, at 984.94. The Nasdaq Composite Index shed 14.55 points, or 0.83 percent, at 1,740.33.
The S&P financial index fell 3 percent.
In the last hour of trading, U.S. Treasury Secretary Henry Paulson warned that the turmoil "will not end quickly." He also said it may be several weeks before the Treasury Department begins buying unwanted and illiquid assets from financial firms under the $700 billion bailout program that Congress approved last week and that is now U.S. law.
With financial markets awash with signs that credit is expensive and hard to come by, investors sold off banking shares on both sides of the Atlantic.
Peter Jankovskis, director of research at OakBrook Investments LLC in Lisle, Illinois, said a confidence crisis was stopping banks from lending.
"It's not that the rate terms are not favorable, they're just scared to death that they'll never get the money back."
In Europe, the FTSEurofirst 300 closed down 6.3 percent at 940.78 points, its lowest close since December 2003. The index has lost 13.6 percent this week.
The banking sector took the most points off the index, with Anglo Irish Bank (ANGL.I: Quote, Profile, Research) sliding 15.6 percent and Deutsche Bank (DBKGn.DE: Quote, Profile, Research) falling 10.7 percent.
Some British financial shares rose, however, after Britain announced a multi-billion pound rescue package for banks that included plans to inject up to 50 billion pounds of government money into the country's biggest operators.
Despite the flight to safety, U.S. Treasury prices fell after two auctions totaling $16 billion.
The benchmark 10-year U.S. Treasury note fell 46/32 in price to yield 3.68 percent, and the 2-year U.S. Treasury note slipped 8/32 in price to yield 1.60 percent.
The dollar fell against a basket of major currencies, with the U.S. Dollar Index off 0.26 percent at 80.908. Against the yen, the dollar fell 1.46 percent at 99.85.
The euro rose 0.31 percent at $1.3659.
Spot gold rose $18.60 to $905.20 an ounce. Spot gold has risen 25 percent since mid-September.
Oil prices hit a 10-month low, but pared losses after U.S. stocks rose.
U.S. crude settled at $88.95 a barrel, down $1.11. London Brent crude fell 6 cents to $84.60 a barrel by 2:53 p.m. (1853 GMT).
In Asia, the Nikkei plunged 9.4 percent in its biggest one-day drop since the 1987 stock market crash, on fears of a global recession.
The MSCI Asia-Pacific index of stocks outside Japan tumbled 7 percent, dragged down by the global financial panic.
The International Monetary Fund said the financial upheaval would exact a heavy economic toll as markets wrestle with a crisis of confidence and global credit is choked off. It said the world economy was set for a major downturn with the United States and Europe either in or on the brink of recession.
Since global markets peaked about 12 months ago, more than $12.4 trillion in stock market wealth across the world has been wiped out, according to MSCI's main world equity index.
