By Richard Hubbard
LONDON (Reuters) - Clear signals from the U.S. Federal Reserve that it will soon stop pumping money into the global economy and data pointing to slower growth in China sparked sharp falls in bonds, shares and commodities on Thursday.
Emerging markets, many of which have been primed by the cheap Fed cash, saw some of the biggest selling as investors rushed to the exits.
MSCI's benchmark index for emerging equities slumped more than 3.3 percent and shares across the Asian Pacific region outside Japan recorded their biggest daily drop since late 2011.
World stocks in general saw the largest one-day drop for 12 months, falling 1.85 percent with U.S. stock futures pointing to further losses when Wall Street opens.
Among other unwanted milestones, gold and silver tumbled to near a three-year lows while South African 10-year bond yields posted their biggest one-day rise in a decade.
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The initial catalyst for the selloff was Fed Chairman Ben Bernanke's surprisingly strong commitment to end the central bank's asset buying by the middle of 2014. That sent 10-year U.S. Treasury note yields to 15-month highs.
"The Fed has reduced uncertainty about some of its plans and that is probably one of the key differences to what the markets' expectations were heading in to the meeting," said Ken Dickson, investment director at Standard Life.
"I think it is quite reasonable that the tapering will begin later this year but what looks a little bit more optimistic is that the process will be finished by mid next year."
The jump in U.S. Treasury yields after Bernanke's comments sparked a rush of funds into the dollar, which gained 0.6 percent against a broad range of currencies. Against the yen, it jumped 1.5 percent to 97.95 yen.
The dollar trimmed its gains against the yen and euro after data showed the number of Americans filing new jobless benefit claims rose more than expected last week.
U.S. ROBUST, MARKETS UNCERTAIN
The Fed's $85 billion of monthly bond purchases has helped keep the world awash in investment cash as it has struggled with a severe economic downturn.
So Bernanke's commitment to begin cutting back on the spending before the end of this year and end it in 2014 if the economy keeps improving makes the outlook for financial markets more uncertain. This comes despite the fact that the move is motivated by expectations of a more robust U.S. economy.
"We see (Bernanke's statement) as a good sign in the long term as it shows that a return to normal monetary policy is in the offing, that economic growth is picking up," said James Humphreys, senior investment manager at Duncan Lawrie Private Bank.
However, in the near term such a policy shift in the face of low inflation and a still modest growth was seen likely to make investors more risk-averse until the situation became clearer.
"We suspect that (the Fed) has made a policy mistake. We do not believe that growth is as robust as the way the Fed has characterised it," Gary Dugan, chief investment officer for Asia and the Middle East at Coutts.
The shift out of riskier assets gained added momentum from a survey of China's factories earlier on Wednesday, showing activity at a nine-month low as a squeeze in the nation's money markets sent short term rates to record highs.
The stress this caused investors was clear in the Asian credit markets, where the spread on the iTraxx Asia ex-Japan investment-grade index widened 23 basis points, reflecting the rising cost of hedging against debt default.
In the region's currency markets the Philippine peso hit its weakest to the dollar since May 31 last year, South Korea's won fell 1.4 percent and India's rupee hit an all-time low, prompting intervention.
"If you put the Chinese numbers together with the policy statements from both (the U.S. and China), what's clear to me is that the emerging market currencies, particularly with a commodity bias, will continue to go down," said Mark Matthews, head of Asia research at Julius Baer.
EUROPE'S GLOOM LIFTING?
In the euro zone, a survey of business activity helped offset some of the gloom by suggesting the bloc's long-running recession was finally beginning to ease.
The most encouraging picture was in southern Europe where countries such as Spain and Italy saw the smallest declines in two years.
But the broad FTSEurofirst 300 index, which hit a 5-1/2 year high last month, fell by over 2 percent by midday, to near a 2-month low.
In commodity markets the combined impact of less Fed money and weaker Chinese demand sent Brent oil $2 a barrel lower for its biggest daily slide in close to three weeks.
Gold tumbled past the lows set during a sharp selloff in mid-April to be below $1,300 an ounce, its weakest level since September 2010.
Useful links:
Euro zone flash PMIs: https://bsmedia.business-standard.comlink.reuters.com/cuh64s
Asset returns since the Fed's tapering hint: http://link.reuters.com/hyb68t
Currencies v dollar in 2013: http://link.reuters.com/tak27s
(Editing by Jeremy Gaunt, John Stonestreet)