World stocks, euro slump as risk aversion grows

Click to enlarge photo

By Herbert Lash

NEW YORK (Reuters) - World stocks, commodities and the euro all tumbled on Tuesday as risk aversion grew on concerns over funding for European banks that must repay almost half a trillion euros in emergency loans this week.

A sharp drop in U.S. consumer confidence also eroded risk appetite, pushing up the price of government debt on both sides of the Atlantic and helping firm other safe-haven assets, such as gold.

Yields on the benchmark U.S. 10-year Treasury fell below 3 percent for the first time since April 2009, while the euro hit an all-time low versus the Swiss franc and an 8-1/2-year trough against the yen.

Interbank euro funding costs rose to an eight-month high, and the price of German Bunds hit three-week highs, buoyed by the slide in U.S. Treasury yields.

"It is a return to risk aversion," said Eugen Weinberg, a commodity analyst at Commerzbank in Frankfurt.

Fears of a potential liquidity shortfall of more than 100 billion euros in the financial system stoked the aversion to risk as European banks were poised to repay 442 billion euros ($545.5 billion) to the European Central Bank on Thursday.

The Standard & Poor's 500 Index, a U.S. stock benchmark, slid to within 2 points of its 2010 low, a threshold that if broken, could trigger a further sell-off. The index was also on course to close at its lowest level since November.

European shares hit a three-week closing low, breaking a key technical support level. The FTSEurofirst 300 index of top European shares ended down 3 percent at 995.82 points, its lowest close since June 9.

The Euro STOXX 50 fell below a retracement level from its April high and May low, signaling more losses.

MSCI's all-country world index slid nearly 3 percent, and its emerging markets index fell 2.8 percent.

At 1 p.m. EDT (1700 GMT), the Dow Jones industrial average tumbled 236.85 points, or 2.34 percent, at 9,901.67. The Standard & Poor's 500 Index dropped 28.62 points, or 2.66 percent, at 1,045.95. The Nasdaq Composite Index slid 68.49 points, or 3.08 percent, at 2,152.16.

SHORT COVERING

Traders cited significant U.S. dollar short-covering overnight, further weighing on the euro.

The euro was down 0.69 percent at $1.2192, while the dollar was up against a basket of major currencies, with the U.S. Dollar Index adding 0.50 percent at 86.076.

The risk premium on southern European government bonds over benchmark German bunds widened and the cost of insuring their debt against default rose.

Banks were among the heaviest decliners as they prepared to pay back the ECB money that was borrowed a year ago at rock-bottom rates.

The STOXX Europe 600 banking index fell 4.2 percent, while Barclays Plc, BNP Paribas, Societe Generale and Credit Agricole SA were off between 6.3 percent and 7.9 percent.

Even though U.S. single-family home prices climbed unexpectedly in April from the previous month, signs of a sustained recovery have not yet emerged, according to Standard & Poor's/Case Shiller.

Its composite index of prices in 20 U.S. metropolitan areas rose 0.4 percent on a seasonally adjusted basis after a downwardly revised 0.2 percent drop in March.

U.S. light sweet crude oil fell $2.53 to $75.72 a barrel, while ICE Brent fell $2.42 to $75.17, and copper shed more than 4 percent on concerns about an economic recovery.

Benchmark 10-year notes traded 10/32 higher in price to yield 2.99 percent.

Gold advanced, and U.S. Treasuries rose, pushing two-year note yields to the lowest on record, as jitters over the euro zone debt crisis supported safe-haven demand.

Spot gold prices added $6.50 to $1,243.50 an ounce.

(Reporting by Angela Moon, Chris Reese in New York; Kirsten Donovan, Emelia Sithole-Matarise, Atul Prakash, Harpreet Bhal, Jan Harvey and Christopher Johnson in London; writing by Herbert Lash; editing by Jeffrey Benkoe)