A Tokyo Stock Exchange official reacts as Japans Nikkei 225 stock index… (Everett Kennedy Brown,…)
Reporting from Los Angeles and New York— — Amid the turmoil in global financial markets, hiding out at home has been a decent strategy for U.S. investors.
Escalating social unrest in the Middle East and North Africa over the last few weeks has triggered a rush of money into U.S. Treasury securities, driving their interest rates down sharply.
And in recent days, while most major stock markets around the world have been battered in the aftermath of Japan's devastating earthquake and tsunami, U.S. stocks have held up surprisingly well.
On Tuesday, Japan's Nikkei-225 stock index plunged 10.6% — its biggest one-day drop since October 2008 — as investors panicked over rising levels of radiation escaping from the stricken Fukushima nuclear power complex.
The sell-off in Japan dragged down markets across Asia and in Europe. Yet U.S. stocks climbed back from steep early losses to finish with relatively modest declines. The Dow Jones industrial average ended down 137.74 points, or 1.2%, to 11,855.42, paring what had been a loss of nearly 300 points at the opening bell.
Global upheaval "makes the U.S. a better safe haven," said Gail Dudack, head of Dudack Research Group in New York.
Investors often gravitate to the biggest and most liquid securities in times of trouble, which typically means markets in the U.S., Japan and Europe.
But Japan can't play that role now, given the massive uncertainty about its economy in the near term.
And concerns about Europe's government debt crisis still pervade those markets, despite the European Union's decision last week to beef up a bailout fund for the most financially distressed countries.
Late Tuesday, Moody's Investors Service downgraded Portugal's debt rating to A3 from A1 and said the outlook was negative. Although the country may be able to reduce its crushing debt costs by using the EU's bailout fund, "Questions would remain as to when the government would be able to re-access the capital markets and on what terms," Moody's said.
Although the U.S. government's soaring debt burden remains a source of deep concern to many investors, Uncle Sam still has no trouble borrowing. And as stock markets have crumbled in recent weeks, safety-seeking investors have flocked back to Treasury securities, pushing their yields down.
The annualized yield on five-year T-notes plunged to a six-week low of 1.98% on Monday from 2.05% on Friday. The yield fell further early Tuesday before ending at 1.96%.
Falling interest rates mean bonds are rising in value.
On Wall Street, stocks have pulled back over the last three weeks after surging early in the year on optimism about the economic recovery. But the losses have been far smaller than the declines in Japan and Europe.
With Tuesday's drop, the Dow is down 4.3% from its multiyear high reached Feb. 18. By contrast, the Japanese market has plunged 21% in the same period and the average European blue-chip stock is down 8.6%.
Some emerging markets also have weathered the latest market turbulence better than investors might have expected. The Brazilian market has eased just 1.6% since Feb. 18 after being hit harder earlier in the year.
Still, it isn't clear that U.S. stocks can avoid deeper losses, particularly if oil prices resume their climb because of conflict in the Middle East and North Africa.
"The risks for the U.S. market are more subject to what happens in the Middle East than what is occurring in Japan," said Alan Ruskin, chief foreign currency strategist at Deutsche Bank in New York.
Oil prices tumbled Tuesday amid a general sell-off in commodities, as investors and traders dumped high-risk assets across the board.
Crude futures in New York fell $4.01 to $97.18 a barrel, the lowest closing price since Feb. 28, despite a declaration of a state of emergency in Bahrain as its government sought to put down the popular uprising challenging the monarchy.
Traders said worries about Middle East oil supplies were being offset, for now, by expectations of lower demand from Japan as its economy reels from the earthquake and tsunami.
Prices of corn, wheat, cotton and coffee also plummeted Tuesday.
"It's just, 'Get out of the risk' — because you don't know what's going to happen" in Japan, said Frank Lesh, a trader at FuturePath Trading in Chicago. "You don't stand in the way of this."
Even gold — usually a popular haven in times of turmoil — slid as some investors took profits from the metal's recent surge. Near-term gold futures in New York fell $32, or 2.2%, to $1,392.60 an ounce.
Rising raw-material costs stoked inflation pressures worldwide in recent months, but traders now are uncertain about commodity demand as Japan's woes raise fresh concerns about global growth.
"This gives us some breathing room" on commodity prices, said Jim Swanson, chief investment strategist at MFS Investment Management in Boston.