Markets roiled by Nikkei's 7.3 percent slide
LONDON (AP) -- Financial markets around the world were roiled Thursday after Japanese stocks suffered their biggest slide since the country was hit by a devastating tsunami more than two years ago.
As a day of huge volatility ended in Europe, a steadier tone on Wall Street was emerging, easing concerns that the latest sell-off in stock markets represents the beginning of a mini-crash at least.
The volatility was stoked by a 7.3 percent, or 1,143 points, fall in the Nikkei index to 14,483.98. Many factors for the drop were cited, including a spike in the Japanese government's borrowing costs and unexpectedly weak Chinese manufacturing figures.
However, the turn in sentiment in financial markets had its roots in the U.S. on Wednesday and the mixed messages from the Federal Reserve about when it might start scaling back its bond-buying program.
While the written testimony to lawmakers from Fed chairman Ben Bernanke appeared to signal that the central bank wasn't ready to change its policy of flooding the economy with money by buying up bonds from banks, subsequent remarks - and the minutes of the Fed's last rate-setting meeting - triggered speculation that a change is afoot.
Much of the recovery in global stock markets over the past few years has had its roots in the money-creation policies of a number of the world's leading central banks, including the Fed, the Bank of England and most recently the Bank of Japan.
The fresh funds, which have come from the central banks buying financial assets, have found their way into the financial markets. The withdrawal of some of the Fed's stimulus measures has been seen by many in the markets as the greatest threat to stocks for some time.
Others say financial markets need to get over their addiction to stimulus and the ending of these emergency central bank policies will be a clear signal that the global economy is healing well from the financial crisis and the deepest recession since World War II.
Those longer-term considerations didn't hold much sway during the Asian and European sessions. However, U.S. markets had recovered their poise.
"U.S. markets are not showing the same inclination to drop sharply as seen in Japan and Europe, which will give the optimists some hope that the latest dip will prove to be as short-lived as all the others this year," said Rupert Osborne, a futures trader at IG.
In Europe, the FTSE 100 index of leading British shares closed down 2.1 percent at 6,696.79. Germany's DAX, which has hit a series of all-time highs recently, also tumbled 2.1 percent to 8,351.98 while the CAC-40 in France fell 2.1 percent at 3,967.15.
In the U.S., the Dow Jones industrial average was down only 0.1 percent at 15.294 while the broader S&P 500 index fell 0.4 percent to 1,649. U.S. stocks had less room to fall following their falls on Wednesday.
Some sort of decline in global indexes, especially in the Nikkei, had been anticipated over recent sessions following a run that's seen many hit historic highs - after all, investors always look to cash in on their profits at some stage.
However, the scale of the retreat in Japan in particular has raised questions over the underlying motives behind the rally.
The main debate now in the markets is whether Thursday's developments mark the end of the euphoria that has gripped many investors this year.
"Whether this marks the beginning of the correction, or whether the bulls dust themselves down for another go remains to be seen, but it appears inevitable that we're going to see more of the same in the months ahead," said Mike McCudden, head of derivatives at Interactive Investor.
Much of the near-term outlook could rest on the performance of the Nikkei, which has been the best-performing major index this year, having risen around 45 percent - before Thursday's loss - to five-year highs. The index has been buoyed by the announcement of an aggressive monetary stimulus from the Bank of Japan, which has piled the pressure on the yen. That development is a potential boon to the country's exporters and therefore to growth - a favorable backdrop for stock investors.
Many in the markets blamed the Nikkei's fall on the spike in the interest rate charged on country's benchmark 10-year bond to above 1 percent for the first time in a year. That unnerved investors at a time when Japan's already overburdened government finances are vulnerable to rises in interest rates. The interest rate, or yield, later slipped back to about 0.9 percent.
The sell-off is a reminder of Japan's vulnerability as Prime Minister Shinzo Abe tries to end two decades of stagnation with unprecedented monetary easing, increased government spending and reforms to make the world's No. 3 economy more competitive.
The level of Japan's debt is higher, relative to its economy, than even some of the crisis-stricken European countries. But because it is mostly owned by domestic investors, especially huge banks and insurance companies, the country's credit rating has remained steady. About a quarter of the national budget is interest payments on government debt.
Markets elsewhere in Asia sank sharply after a survey showed China's manufacturing contracted in May. HSBC said its preliminary Purchasing Managers Index fell to a seven-month low of 49.6 in May from April's 50.4. Numbers below 50 indicate that activity is contracting. Analysts had expected a more modest decline to 50.3.
The Shanghai Composite Index lost 1.2 percent to 2275.67, its biggest fall in a month while the smaller Shenzhen Composite Index shed 0.7 percent to close at 1014.47.
Elsewhere, Hong Kong's Hang Seng slumped 2.5 percent to 22,669.68. South Korea's Kospi lost 1.2 percent to 1,969.19. Australia's S&P/ASX 200 dropped 2 percent to 5,062.40.
There were big moves across a range of financial assets.
In the currency markets, the yen was the main mover following the rise in Japanese yields. The yen has bounced back strongly, after falling to near five-year lows against the dollar on Wednesday. The dollar was trading 1 percent lower at 101.64 yen, having earlier fallen to a low of 100.86 yen.
Oil prices were under the kosh too amid concerns over the global growth environment - the benchmark New York rate was down $1.55 at $92.73 a barrel. Gold, however, was in demand as it benefited from its status as a haven at a time of uncertainty. It was up 0.8 percent at $1,378 an ounce.
Sampson contributed from Bangkok.