Investors dump gold, crude as growth reality dawns

By Chikako Mogi

TOKYO (Reuters) - Commodities from gold to oil recouped some of their earlier steep losses but remained volatile after investors dumped risk assets overnight, gripped by worries over slowing growth in China and the United States.

European stock markets were seen extending losses, with financial spreadbetters predicting London's FTSE 100 <.ftse>, Paris's CAC-40 <.fchi> and Frankfurt's DAX <.gdaxi> to open down as much as 0.8 percent. <.l><.eu/>

U.S. stock futures were up 0.5 percent, pointing to a rebound at the Wall Street open after U.S. stocks dropped more than 2 percent <.n> and the Standard & Poor's 500 index <.spx> had its worst day since November 7 overnight, after two bombs ripped through the crowd at the finish line of the Boston Marathon on Monday killing at least three people and injuring more than 100.

The MSCI's broadest index of Asia-Pacific shares outside Japan <.miapj0000pus> eased 0.1 percent after shedding as much as 1 percent to come closer to a 2013 low hit earlier this month, dragged down by its materials <.miapjmt00pus> and energy <.miapjen00pus> sectors.

Markets were ripe for some correction after recent rallies.

U.S. stocks hit record highs, underpinned by optimism about a steady recovery in the world's two largest economies, despite patchy economic reports. Oil and base metals were resilient despite supply capacities, and investors piled up positions shorting the yen on expectations for bold monetary stimulus.

"Broadly, risk markets had been rallying at a pace not in line with a tepid global growth recovery, so in a way, they are trying to revert to levels more in line with fundamentals. It's time to book profits from recent rallies and hoard cash," said Naohiro Niimura, a partner at research and consulting firm Market Risk Advisory in Tokyo.

Cash gold and U.S. gold futures plunged to their weakest in more than two years, pulling silver lower and dragging Tokyo gold futures down almost 10 percent.

Spot gold fell as much as 2.3 percent to $1,321.35 an ounce before recovering to $1,352.56 while silver shed as much as 2.4 percent to $22.04 before trading up at $22.76.

On Monday, the price of gold bullion tumbled another $125 per ounce in its biggest-ever daily loss, and its 9 percent loss was the biggest since 1983.

"Price actions point to a full-fledged flight of funds out of gold markets. Gold stands to lose the most," Niimura said, as a progress in fiscal consolidation will boost the allure of U.S. debt, reducing demand for an alternative safe-haven such as gold.

Gold has been struggling to extend gains this year as a recent rally in U.S. and global equities drained money out of bullion while concerns about central bank selling and a steady drop in exchange traded funds on selling by large investors further undermined investor sentiment.

Brent crude futures fell below $100 for the first time in nine months on Tuesday and last traded down 1 percent at $99.58 a barrel and U.S. crude traded down 1.3 percent at $87.60 after hitting a four-month low of $86.06.

Investors will likely reassess their portfolio allocations for the second quarter, with Japan possibly surprising on the upside while uncertainty may take a deeper hold on the European and Chinese economies. The U.S. may be starting to feel the pain of its fiscal contraction.

"I think the underlying driver is markets around the world are making an adjustment to some of the major commodity markets," said Ric Spooner, chief market analyst at CMC Markets. "They're now forecasting that the decline in commodity prices looks as though it might be happening sooner and that it's going a bit deeper than analysts had previously forecast."

Shanghai copper fell to an 18-month trough of 51,920 yuan ($8,400) a tonne earlier, tracking losses in benchmark London copper overnight when it hit its lowest in a year and a half at $7,085 a tonne. London copper was last up 1 percent at $7,271 on Tuesday.

YEN SHORTS UNWOUND

Among the few assets that bucked the sell-off and gained was the yen, as the reversal in recent positioning meant short sales on the Japanese currency had to be covered.

The dollar fell to a low of 95.67 yen and the euro also hit a low of 125 yen earlier but the dollar managed to crawl back nearly two yen and was last at 97.55 yen, while the euro also recovered to 127.53 yen.

"Assets with large positions being built up will be squeezed out," said Hiroshi Maeba, head of FX trading Japan for UBS in Tokyo, noting that equities had been rallying recently on growth optimism. "In this light, the yen may firm a bit more given the way the currency's short positions had built up."

A U.S. regional manufacturing report on Monday showed the pace of growth slowed, the latest indication the economy lost some steam heading into the second quarter, and coming just after news the Chinese economy unexpectedly stumbled in the first three months of 2013.

The sell-off in gold hit metals-sensitive Australian shares <.axjo>, but they recovered some losses and were down 0.3 percent.

Japan's Nikkei average <.n225> also trimmed earlier losses to edge down 0.1 percent, after tumbling as much as 2 percent earlier as the yen's rebound took a toll on sentiment.

(Additional reporting by Thuy Ong in Sydney; Editing by Eric Meijer)

Source: http://news.yahoo.com/yen-firms-risk-assets-brace-another-rout-000147289--finance.html

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