Investor confidence took a fresh body blow on Friday as an emergency funding plan to rescue Wall Street''s fifth biggest broker Bear Stearns hammered global equity markets and boosted safe-haven flows to government bonds and inflation hedges like gold.
US stocks tumbled more than 2 percent, wiping out much of the gains from the biggest rally on Wall Street in five years earlier in the week, as fears darkened about a credit crisis. "It''s very clear that there is deepening concern about the credit crisis. Most investors believe that there are more shoes to drop," said Hugh Johnson, chief investment officer of Johnson Illington Advisors in Albany, New York.
The stock of Bear Stearns shed 40 percent of its value and dragged down other financial shares in a volatile session on the stunning news that the New York Federal Reserve Bank had intervened along with J.P. Morgan Chase on the rescue package.
Investors piled into the relative safety of US Treasuries and European government debt as equity markets plunged. Bond yields fell as some investors speculated the Fed will now cut interest rates more sharply when policy-makers meet next week.
The dollar fell to a fresh 12-1/2-year low against the yen and yet another record low against the euro amid growing concerns that the US economy is in for a long recession and its interest rate differential with Europe will widen.
US rate futures now point to a growing possibility of a full percentage point rate cut at Tuesday''s Fed meeting, after anticipating one half that size earlier in the week.
The Bear Stearns news furthered a recent move into the safer assets and gold which have been benefiting from the shakiness of other investments. Daniel Hynes, a metals analyst at Merrill Lynch, said, "That has been a key driver of gold over the last couple of months. So this announcement just adds fuel to that fire."
The metal has gained more than 20 percent this year on top of a 32 percent gain in 2007. Gold touched a record peak above $1,000 for a second day. Spot gold surged as high as $1,007.10 an ounce; it was at $996.90/997.70 by New York''s last quote at 2:15 pm EDT (1815 GMT), up from $991.00/991.80 late on Thursday.
The Dow Jones industrial average closed down 1.6 per cent at 11,951.09, according to unofficial figures. The Standard & Poor''s 500 Index fell 2.08 percent at 1,288.14 and the Nasdaq declined 2.26 percent at 2,212.49.
An initial announcement that J.P. Morgan Chase would provide financing to Bear Stearns lifted European shares and US index futures, on the view that a white knight had stepped up.
But later statements that said the firm''s cash position had deteriorated and the Federal Reserve Bank of New York also was part of the emergency funding plan soured investor sentiment. News of the emergency financing also pulled down European shares. The FTSEurofirst 300 index closed down 1.1 percent at 1,255.02 points, with more than two-thirds of its constituents falling.
Amid the fresh wave of investor jitters mining stocks rose in Europe amid climbing metal prices. Rio Tinto rose 2.6 percent, BHP Billiton 3.4 percent and Xstrata 1.4 percent.
The euro hit the new all-time record at $1.5688 before easing to $1.5644, unchanged from late Thursday, and fell below parity with the Swiss franc for the first time. The credit concerns overshadowed earlier tame inflation data that cheered investors and initially lifted European shares and US index futures.
US crude settled down 12 cents to $110.12 a barrel in volatile trade after touching a record for the seventh time in a row on Thursday. London Brent hit a record of $108.02 a barrel before easing back to $107.45.
Crude is up nearly 8 percent already in March and about 14.5 percent this year. Gold seen as a safe-haven asset during financial and political troubles, surged to $1,009 an ounce. The active gold contract for April delivery in New York settled up $5.70 at $999.50 an ounce.
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