Investors Dash for Lifeboats; Money flees to Dollar and Yen.


Investors around the world scrambled for safe havens as fears of a global economic slowdown grew.


The yen briefly touched a 15-year high against the U.S. dollar, the euro suffered its worst selloff in nearly two years, and global stock markets tumbled.


A day after briefly cheering the Federal Reserve’s announcement it would buy Treasury debt to bolster the U.S. economy, investors Wednesday began fretting about the negative implications of the move: The world’s biggest economy still needs extraordinary government help.


Stocks, commodities and riskier currencies fell on worry over the flagging U.S. recovery and slowing growth in China. All three major U.S. indexes turned negative for the year. Dennis Berman and Michael Casey discuss. Also, Robert Lee Hotz discusses the discovery in Ethiopia of what researchers consider the earliest known traces of stone-tool use, possibly pushing back the advent of technology about 800,000 years.


Data on Wednesday showed the U.S. trade deficit widened, and there were worrying economic signals out of China and Japan. All that fed investor angst. “It’s pretty clear that economic gravity is setting in,” said Talley Leger, portfolio strategist at Barclays Capital.


In early trading in Asia on Thursday, the yen rose further from Wednesday’s close, although it didn’t reach that day’s intraday high of 84.72 yen to the dollar. One dollar was buying 85.13 yen, from 85.37 yen Wednesday in New York.


Market sentiment has soured quickly. It underscores just how jittery investors remain nearly two years after the collapse of Lehman Brothers Holdings Inc. sent markets world-wide crashing.


Just last month, stocks and other risky investments were rallying in response to solid corporate profits. There were also hopes that, with European sovereign-debt woes temporarily abated, the global economy could avoid a second dip into recession.


But the Fed’s downbeat assessment on Tuesday seemed to bring the risks to the global economy into sharper focus. It followed a string of disappointing U.S. economic data, particularly in the labor market.


As a result, “money is shifting pretty rapidly from one thing into another,” said Michael Cirami, a portfolio manager at Eaton Vance Investment Managers in Boston.


To the extent that there has been encouraging economic news lately, it has generally stemmed from international trade. The U.S., the euro zone and Japan could all benefit from growing trade. But with China showing increasing signs of slower economic growth, hopes of robust export-driven growth seem to be fading.


Underscoring that risk, the U.S. trade deficit in June was the widest since October 2008, the Commerce Department said. That implies slower growth in the U.S.


The Bank of England on Wednesday downgraded its outlook and kindled expectations that it may also take more extraordinary action to boost the U.K. economy.


The Dow Jones Industrial Average tumbled 265.42 to 10378.83, falling back into negative territory for the year. The U.K. FTSE 100 fell 2.44%, and the Stoxx Europe 600 lost 2%. Nymex crude-oil prices tumbled 2.8% to $78.02 a barrel.


Early Thursday, Japan’s Nikkei Stock Average was down 1.6%, extending its fall of 2.7% Wednesday. That puts Japanese stocks close to bear market territory, down 19% since the Nikkei’s yearly high in April. Markets in South Korea and Australia were also lower.


Europe’s problems also seem to be flaring up again. Market prices for protecting against European sovereign debt defaults surged. On Wednesday, the euro dropped 2.3% against the dollar, the biggest one-day decline since October 2008. The currency fell further in early Asia trading Thursday, fetching $1.2855, from $1.2882 Wednesday.


Investors have returned to the safe-haven assets they have sought frequently in recent years, including the Japanese yen and the U.S. dollar. The U.S. dollar index, which measures the greenback against a basket of other currencies, including the yen, rose nearly 2%. Gold prices rose for the 9th day of the past 11, to nearly $1,200 an ounce.


A long rally in relatively risk-free Treasury debt continued. That drove the yield on 10-year Treasury notes, which moves in the opposite direction of price, to 2.69%, its lowest level since April 2009.


If there was any silver lining to Wednesday’s widespread fear, it was that the U.S. government was able to auction off $24 billion in fresh 10-year debt without a hitch, despite low yields.


What’s more, with interest rates low, corporate borrowers with credit ratings below investment grade have been able to sell new “junk” bonds at a record-setting pace this week, according to data provider Dealogic. With cash yielding next to nothing, investors have been clamoring for higher-yielding corporate and government debt perceived as safer than stocks.


The Fed’s announcement on Tuesday that it planned to buy more Treasury debt as its mortgage holdings mature may have encouraged investors to buy government bonds. But interest rates have fallen steadily for the past four months without additional Fed intervention.


That is partly because investors have grown increasingly anxious about the outlook for economic growth around the world, particularly after the eruption of Europe’s debt problems this spring.


The short-term resolution of Europe’s issues helped spark relief rallies in many markets, including U.S. stocks. But the bond market continued to price in ever-more-dire economic outcomes. On Wednesday, stocks and other investments seemed to be dancing to the bond market’s tune and embracing a darker outlook.


With bond yields dropping amid the specter of deflation, or a decline in prices, investors are worried that a prolonged Japan-style malaise is about to grip the U.S. and Western Europe. “The comparisons to Japan keep coming back,” said David Owen, chief European financial economist at Jefferies in London. “What the Fed is doing, by trying to drive down the yield curve, draws a parallel with Japan.”


Ironically, the Japanese yen has benefited from the Bank of Japan’s decision this week not to intervene in its own economy. On the same day that the Fed said it would prolong its debt-buying program to fight the prospect of a slowdown, the Bank of Japan held pat, enacting no further stimulus despite calls for action by the government and some opposition politicians.


Bank of Japan Gov. Masaaki Shirakawa noted that corporate profits in Japan were up, compared with the last time the bank provided liquidity to the markets in December 2009.


One risk for Japan is that slowdowns in the U.S. and China, major trading partners, could affect Japanese growth. A higher yen could also hurt the economy by making Japan’s exports more expensive. A stronger dollar could have a similar effect on U.S. multinational companies.


“One of the few supports we had for the July rally in share prices was a weakening dollar, and now that’s starting to wane,” said Mr. Leger of Barclays Capital.


—Dave Kansas contributed to this article.

Write to Mark Gongloff at, Alex Frangos at and Tom Lauricella at




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