Financial market nerves morphed into a full-scale flight from risk Wednesday as mounting fears about euro zone debt and the U.S. economy snowballed into an exodus from stocks and commodities.
With the government of debt-riddled Greece in turmoil and Moody's threatening to downgrade three of France's biggest banks because of their exposure to Greek debt, a fresh string of weak U.S. economic indicators pushed already worried investors over the edge, triggering a widespread flight to safety. Investors yanked funds out of equities, commodities and risk-sensitive currencies in favour of the U.S. dollar, long-term U.S. government bonds and gold.
The S&P/TSX composite index slumped 126 points, or 1 per cent, while New York's Dow Jones industrial average tumbled 179 points. The VIX index , a measure of U.S. stock market volatility, jumped 17 per cent to 21.32, its first reading above 20 in nearly three months.
The Thomson Reuters/Jefferies CRB index, a global benchmark for the commodity market, dropped 2.3 per cent, led by oil's slide of $4.56 (U.S.) to $94.81 a barrel in New York.
Meanwhile, U.S. government bonds surged, sending the yield on the 10-year bond down 13 basis points to 2.97 per cent. (A basis point is one-hundredth of a percentage point.) The U.S. dollar jumped 1.6 per cent against a basket of major global currencies to a three-week high.
"The euro [zone]situation was certainly a headwind. We had a risk-off tone," said David Watt, senior fixed income and currency strategist at RBC Dominion Securities.
But the unloading of riskier asset classes accelerated, he said, after the Empire State Manufacturing Index - a key measure of regional economic activity in New York State - unexpectedly slumped into negative territory for June, indicating an outright contraction in the manufacturing sector in an important region of the country. This came after U.S. inflation numbers came in higher than expected and U.S. industrial production numbers disappointed the market.
"It underlines the troubles that the economy has been having for a while now," he said.
The footing of global stock markets has been deteriorating along with the economic picture. Most of the world's major stock indexes have recently fallen below their 200-day moving averages - a key indicator of market quality watched by traders. The S&P 500 , the broad U.S. stock market benchmark and a key indicator for global trading, is now a thin 0.7 per cent above its 200-day moving average, after slumping 22 points Wednesday. If the S&P 500 breaches that mark, it could signal an even deeper funk in global stock markets.
"Risk-sentiment indicators have been rolling over. We're moving into maybe not outright risk aversion, but certainly a heightened level of caution," Mr. Watt said.
Richard Briggs, a commodities and foreign exchange trader with MF Global Canada in Montreal, said the unsettled global markets are a reminder that the world's financial system is still on wobbly ground - and risks continue to hang over investors.
"It's what we're going to have to get used to as the world de-leverages," he said. "There's still too much debt. It's going to be a long and difficult process."
David Parkinson