By Caroline Valetkevitch
NEW YORK (Reuters) - World stock indexes declined for a fourth day and copper dipped to near four-year lows before rebounding on Wednesday as worries about China's economic slowdown intensified.
The concerns over China also pressured the Chilean peso and other currencies closely linked to commodities markets, while increasing investor appetite for safe-haven assets boosted U.S. government bonds and gold.
The moves follow China's first domestic bond default, which has raised concerns about a possible unraveling of the many loan deals which have used copper as collateral.
Chinese firms that have difficulty raising loans have often bought copper as security for funds they borrow, but the 14 percent drop in copper's value this year is making banks more wary about the practice.
Data, including China's recent weak export numbers, has underscored worries that the world's second-largest economy is slowing. This has added to strains on emerging markets already hit by the U.S. Federal Reserve's decision to scale back its economic stimulus.
"People are reluctant to make big bets right now," said Marc Chandler, chief global currency strategist at Brown Brothers Harriman & Co in New York. "People are just reducing their short position in emerging market exposure."
Copper on the London Metal Exchange slid to a session low of $6,376.25 a tonne, its weakest level since July 2010, before recovering to end at $6,505, up 0.5 percent from Tuesday's close. Three-month LME copper has shed more than 11 percent this year, including a 2.6 percent drop on Tuesday.
"Most people are still cautious so we can't expect a quick rebound," said Andrey Kryuchenkov, analyst at VTB Capital. "On a fundamental point of view we have to wait and see in the second quarter how China stimulates its economy."
On Wall Street, the S&P 500 reversed early losses and ended nearly flat amid signs of progress in diplomatic attempts to ease tensions in Ukraine.
The Dow Jones industrial average fell 11.17 points or 0.07 percent, to 16,340.08, the S&P 500 gained 0.57 points or 0.03 percent, to 1,868.2 and the Nasdaq Composite added 16.144 points or 0.37 percent, to 4,323.332.
U.S. Secretary of State John Kerry will meet his Russian counterpart, Sergei Lavrov, in London on Friday ahead of a referendum Sunday on whether Ukraine's Crimean peninsula will join Russia.
"People are just kind of reassessing, they are looking at that headline and thinking maybe it is not going to turn out to be a disaster in Russia and Ukraine," said Ken Polcari, director of the NYSE floor division at O'Neil Securities in New York.
Shares of Fannie Mae
The difference in yield on Fannie Mae and Freddie Mac bonds over Treasuries declined on the view the Senate plan would assure the government's guarantee of their existing debt. The yield gap between five-year Fannie Mae notes due February 2019 over five-year Treasuries narrowed 0.005 percentage point to about 0.15 percentage point.
In Europe, shares <.FTEU3> closed down 1.1 percent, with shares in big exporters among the hardest hit. German industrial conglomerate Siemens
An index of global stocks was down 0.5 percent, while an emerging market stock index <.MSCIEF> dropped 1.1 percent.
In the foreign exchange market, emerging market currencies rebounded from early losses tied to nervousness over China's economy.
The Chilean peso fell to near five-year lows on a deepening selloff in copper in Asian trading. Chile, a major copper exporter, saw its currency recover to 572.08 pesos.
The Aussie was up after falling earlier in the session.
MOVE TO SAFE-HAVEN AREAS
U.S. Treasuries prices rose on worries over the health of China's economy, which helped fuel strong demand at the U.S. government's 10-year Treasury note auction.
The 10-year U.S. Treasury note was up 12/32 in price to yield 2.72 percent versus a yield of 2.766 percent late on Tuesday. Bond yields move inversely to their prices.
Gold surged 1.3 percent, hitting a near six-month high as fears of more corporate defaults in China and the tug-of-war between Russia, Ukraine and the West boosted bullion's appeal.
Spot gold gained 1.3 percent to $1,367.04 an ounce, having reached $1,370.60, the loftiest since September 20
CHINA IN FOCUS
Economists are concerned that recent moves by Beijing to stamp out speculation on its rising currency and overly easy lending may have overshot and will damage China's economy.
Reuters reported that China's central bank is prepared to loosen monetary policy if economic growth slows further by cutting the amount of cash that banks must keep as reserves. [ID:nL3N0M8207] This was a positive sign for markets, but also a possible indication of Beijing's growing nervousness.
OIL DROPS
Oil prices declined, with U.S. crude oil falling by more than 2 percent in its biggest drop in two months, after the United States announced unexpected plans for a test release of strategic oil reserves while weekly data showed a big rise in crude stockpiles.
Brent crude fell 53 cents to settle at $108.02 and U.S. oil futures dropped $2.04 to settle at $97.99.
(Additional reporting by Marc Jones in London and Sam Forgione, Robert Gibbons, Chuck Mikolajczak and Richard Leong in New York; Editing by Leslie Adler, Chris Reese and Chizu Nomiyama)
