* Global stocks slump on concerns about economic recovery
* Oil falls sharply as Europe debt worries fester
* Bonds rally on flight to safety on U.S. data
(Updates with fresh prices, comment)
By Herbert Lash
NEW YORK, May 20 (Reuters) - Global stocks and commodities
sold off on Thursday, knocking U.S. stocks down 10 percent from
this year's highs in April, on worries that fiscal tightening
is on the rise and will snuff the world's nascent recovery.
U.S. oil prices suffered their biggest one-day loss in 13
months while U.S. government debt prices soared as investors
sold liquid assets and snapped up safe-havens such as bonds.
The 10 percent slide in the benchmark Standard & Poor's 500
Index from April highs is the most significant break in the
rally off of 12-year lows that stocks fell to in March 2009.
The sell-off initially was driven by fear that Europe's
debt crisis would hobble economic growth and then accelerated
on signs that governments need to rein in deficit spending.
Fiscal tightening in debt-strapped developed countries will
slow growth and lower inflation across the world, which is
increasing selling pressure in financial markets, said Bill
Gross, co-chief investment officer at Pimco. []
Gross told Reuters that financial markets are exhibiting "a
mini-relapse of a flight to liquidity as hedge funds and other
leveraged positions are liquidated to preserve capital."
The International Monetary Fund on Wednesday pressed Japan
to begin a "credible" fiscal program which includes a 5 percent
sales tax increase. French President Nicolas Sarkozy proposed
deficit "targets" for France.
The belt-tightening sparked investors' fears while an
unexpected jump in new U.S. jobless claims underscored the
apprehension. Volatility reigned as a sense of instability
unleashed panicky selling across markets.
"Uncertainty has people stampeding for the exits," said
Chris Rupkey, chief financial economist at Bank of
Tokyo/Mitsubishi UFJ in New York.
Shortly before 3 p.m., the Dow Jones industrial average
<> was down 189.62 points, or 1.82 percent, at 10,254.75.
The Standard & Poor's 500 Index <.SPX> was down 21.76 points,
or 1.95 percent, at 1,093.29. The Nasdaq Composite Index
<> was down 49.85 points, or 2.17 percent, at 2,248.52.
Fears that other euro zone countries will follow Germany's
move on Tuesday to ban short selling in some stocks and bonds
helped propel a widespread aversion to risk.
Germany said restoring confidence in the euro was its "top
priority," while a Federal Reserve official said Europe's debt
crisis poses a "potentially serious" risk to the U.S. recovery
as it threatens global credit markets and commerce.
[] []
The dollar was down against a basket of major currencies,
with the U.S. Dollar Index <.DXY> down 1.08 percent at 85.456.
The euro <EUR=> was up 1.28 percent at $1.2586, and against
the yen, the dollar <JPY=> was down 1.47 percent at 90.28.
Market volatility was high. Traders pointed to purchases of
10-year Treasury notes by an Asian buyer and to a huge seller
of e-minis, a futures contract providing holders exposure to
the benchmark Standard & Poor's 500 Index <.SPX>.
The Chicago Board Options Exchange Volatility index <.VIX>,
often referred to as Wall Street's fear gauge, rose as much as
28 percent to its highest since April 2009. []
The benchmark 10-year U.S. Treasury note <US10YT=RR> was up
25/32 in price to yield 3.28 percent.
The Reuters-Jefferies CRB index <.CRB>, a global benchmark
for commodities, at one point slumped to 8-1/2 month lows.
An apparent lack of unity among euro-zone leaders on
tackling debt problems triggered U.S. worries about additional
regulation.
"One of the problems is the European policy makers have
done a very poor job handling this whole crisis ... and the
poor response has further undermined investor confidence," said
Mike O'Rourke, chief market strategist at BTIG LLC in New
York.
U.S. light sweet crude oil <CLc1> fell $1.86 to $68.28 a
barrel.
The expiring June contract for oil on the New York
Mercantile Exchange <CLMO> tumbled more than 8 percent to a
nine-month low as remaining open interests were either rolled
to July or sold, in an effort to avoid physical delivery.
The contract has fallen 26 percent since hitting a 19-month
high of $87.15 on May 3.
"Oil prices are sliding on liquidations ahead of the June
contract's expiration and as we have a glut of oil in the
Cushing, Oklahoma, delivery point," said Phil Flynn, analyst at
PFGBest Research in Chicago.
Spot gold prices <XAU=> fell $5.45 to $1185.30 an ounce.
Worries over the euro zone hammered Asian stocks, driving
MSCI's index of Asia-Pacific shares outside of Japan
<.MIAPJ0000PUS> down 2.4 percent to an eight-month low.
Japan's Nikkei average <> closed at a new three-month
low despite data that showed Japan's economy grew 1.2 percent
in the first quarter, outpacing its euro zone and U.S. peers.
[]
(Reporting by Nick Olivari and Ellen Freilich in New York and
Emma Farge, Ian Chua and William James in London; Writing by
Herbert Lash; Editing by Chizu Nomiyama)
