Mounting fear of a Japanese nuclear disaster sent the world's investors fleeing for financial fallout shelters Tuesday, dealing a sobering blow to the stock and commodity bull markets that until now had seemed all but invincible.
Amid another day of panic selling on Tokyo's stock market - the Nikkei 225 stock index plunged 10.6 per cent, its worst day since October, 2008 - the growing uncertainty surrounding Japan, and what it might spell for the world's economy, convinced money managers to unload riskier assets in favour of cash and low-risk government bonds. That meant widespread selling of commodities and, to a lesser extent, equities, as investors cashed in on the handsome profits from the past six months and moved their money to safer ground.
The Thomson Reuters/Jefferies CRB index of global commodity prices slumped 3.7 per cent, its sixth straight decline, as everything from oil to gold to agricultural commodities were sideswiped by the exodus. Crude oil tumbled nearly $4 (U.S.) in New York, closing at $97.41 a barrel, while gold shed nearly $30 to $1,395.40 an ounce. Money also flowed out of commodity-driven currencies such as the Canadian dollar, which lost 1.23 cents to $1.0146 (U.S.).
"The bids are just disappearing under most of the commodities all of a sudden," said commodities broker Richard Briggs of MF Global Canada in Montreal. "People are shrugging their shoulders and saying, 'We aren't sure what's going to happen, so let's get our money off the table.' "
Asian and European stock markets also felt the pinch, dropping 2 to 3 per cent in many cases. North American markets followed suit early in the day, but found traction as the day wore on, limiting the extent of the declines. Toronto's S&P/TSX composite index lost 0.5 per cent, while the Dow Jones industrial average fell 1.2 per cent.
Selling continued to be heavy among insurance stocks and companies connected to the nuclear industry, including both power generators and uranium producers. At the top of the list was Tokyo Electric Power Co. - operator of the severely damaged Fukushima nuclear plant - which lost nearly one-quarter of its value for a second straight day. In Canada, uranium miner Uranium One Inc. sank 13 per cent, adding to its 28-per-cent plunge Monday.
Japanese government bonds fell and credit-default swap spreads on Japanese sovereign debt widened to record levels, reflecting the darkening cloud of financial risk hanging over the country. But government bonds in other developed countries made strong gains, particularly in the United States, a traditional safe-haven bond market.
"It's a flight to both security and liquidity," said commodities strategist John Kurgan of futures brokerage house Lind-Waldock in Toronto, adding that hedge fund managers were a big part of the selling. "Any of these funds that need to raise some money, they sold metals. They took money off the table."
But market watchers said there are also underlying fundamental concerns behind the selling, both in the world's equity markets and in commodities. They said investors are worried both about short-term reductions in Japanese demand, because of port shutdowns and other earthquake-related disruptions, as well as the longer-lasting effects as the country struggles in coming weeks to get back on its feet - even without the threat of a major nuclear accident.
"To the extent that top-line economic growth is a key driver of company profits, the outlook has been reduced for nearly every company in the world that does business with Japan, as well as for companies in Japan itself. To the extent that profits drive stock valuations - well, you see the result," Carl Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., said in a note to clients.
Craig Basinger, strategist at Macquarie Private Wealth, said a pullback in commodities and equities was overdue after a two-year bull run - including an "uncanny" upward surge ever since the U.S. Federal Reserve Board decided to launch another round of quantitative easing last fall. But he thinks Japan will mark only a temporary retrenching in the markets, rather than the beginning of a downturn.
"This is a correction in a bull market," he said. "The conditions aren't there to make us think we're anywhere near the end of the cycle."
But Mr. Weinberg feels the still-evolving calamities in Japan could throw the normal patterns of a bull market right out the window.
"Normally, you need some kind of a shock [to end a rally] This is a shock, in spades. But this is so far off the charts, we really don't know what to think."