* Clear signal on Fed tapering sparks global asset selloff
* Sell-off accelerates on Wall Street near end of session
* MSCI world markets index drops 3.0 pct in biggest 1-day fall in 19 months
* Oil, gold, copper slump as U.S. dollar gains
By Herbert Lash
NEW YORK, June 20 (Reuters) - Global equity markets, bond prices and commodities fell sharply on Thursday, a day after the Federal Reserve said the U.S. economy was growing strongly enough for it to begin slowing its unprecedented stimulus.
The Fed’s bond-buying program, often called quantitative easing, has lifted both the U.S. economy and world financial markets by pushing interest rates to historic lows.
But Federal Reserve Chairman Ben Bernanke’s statement on Wednesday laying out a likely end to the program by next year, if the economy continues to strengthen, brought a dose of finality to the markets.
“I kind of think of the U.S. economy as this person who was lost at sea with a life vest provided by Ben Bernanke,” said Andrew Szczurowski, a portfolio manager at Eaton Vance in Boston. “And now all of a sudden Bernanke is talking about poking a hole in the life vest, perhaps before the stranded person is able to swim to shore, and we are seeing essentially every market in the world react negatively to this.”
The U.S. dollar rallied further against the euro and yen after stronger-than-expected readings on business activity in the United States supported the Fed’s view of diminished downside risks to the economic outlook.
Home resales jumped to their highest level in 3-1/2 years in May and factory activity in the U.S. mid-Atlantic region rebounded in June to its highest level in more than two years.
The economic data added to investors’ fears that the era of easy money would soon wane, and hammered U.S. credit markets.
Investment-grade bonds were crushed in secondary trading, while China’s overnight repo rate - the interest rate for interbank lending that keeps markets liquid - spiked to 25 percent. The level was reminiscent of the credit market freeze just before the collapse of Lehman Brothers, the nadir of the financial crisis in September 2008.
Equities on Wall Street fell more than 2.2 percent while stocks in Europe dropped 3.0 percent. Government debt prices fell, with yields on the 10-year U.S. Treasury note rising to more than 2.41 percent, a level last seen almost two years ago.
“We thought there would be a correction somewhere. This probably is it. We’ve been looking for a correction since April,” said Bruce Bittles, chief investment strategist at brokerage and research firm Robert W. Baird & Co in Sarasota, Florida.
MSCI’s benchmark index for emerging equities slumped 4.37 percent and shares across the Asian Pacific region outside Japan recorded their biggest daily drop since late 2011. The index fell 3.87 percent.
MSCI’s all-country world index fell 3.43 percent, its largest single-day drop in 19 months, representing approximately $1 trillion in market value. The pan-European FTSEurofirst 300 index of leading regional shares fell 3.07 percent to close at 1,143.99.
On Wall Street, the Dow Jones industrial average was down 354.03 points, or 2.34 percent, at 14,758.16. The Standard & Poor’s 500 Index was down 40.08 points, or 2.46 percent, at 1,588.85. The Nasdaq Composite Index was down 79.76 points, or 2.32 percent, at 3,363.44.
The CBOE Volatility Index, often referred to as Wall Street’s fear gauge, spiked 23.44 percent.
Bernanke’s comments were more hawkish than some had expected and promoted broad selling across bonds, with five- and seven-year notes suffering the most.
The benchmark 10-year U.S. Treasury note was down 19/32 in price to yield 2.4227 percent.
The U.S. dollar rallied to two-week highs against major currencies, and looked set to extend gains.
“The prospect of less QE (and) higher interest rates is something that should help the dollar, particularly in an environment where some other central banks are still moving in the other direction,” said Robert Lynch, senior currency strategist at HSBC in New York.
The euro fell to a session low of $1.3162, a two-week low. It was last at $1.3196, down 0.74 percent on the day.
The U.S. dollar rose 0.88 percent to 97.31 yen.
Oil fell more than $3 a barrel while gold prices tumbled to their lowest in more than 2-1/2 years and silver fell more than 6 percent as markets reacted to Bernanke’s comments and to a drop in Chinese factory activity to a nine-month low.
Emerging markets, many of which have been primed by the cheap Fed cash, took some of the biggest selling as investors rushed to the exits.
A day after the Federal Reserve suggested the U.S. economy was firmly on a recovery path - enough so to withdraw some monetary stimulus - data showed China’s economy was stuttering.
Faltering demand pushed the flash China HSBC Purchasing Managers Index down to 48.3 in June from 49.2, increasing pressure on the People’s Bank of China to loosen the monetary reins.
China’s economy grew at its slowest pace in 13 years in 2012 and data so far this year has been weaker than forecast, bringing warnings the country could miss its 7.5 percent growth target, though possibly not by much.
Meanwhile, Markit’s Flash Eurozone Composite PMI, which makes up around 85 percent of the final reading and is seen as a reliable economic growth indicator for the bloc, remained below the dividing line between growth and contraction. It did, however, rise to 48.9 in June from May’s 47.7, suggesting the decay has eased across the 17-nation bloc.
Crude oil prices also took a hit from a surprise increase in U.S. crude inventories, even in the midst of the summer driving season, when demand for gasoline rises. Stocks rose by over 300,000 barrels, in contrast to the 500,000 barrel drop analysts forecast.
Brent crude settled down $3.97 a barrel at $102.15.
U.S. Comex gold futures for August delivery settled down $87.80 an ounce at $1,286.20.