World markets drop on recovery doubts

Stocks in Europe and the US fell overnight, along with commodities and oil, as disappointing US labour data and increasing concern about Europe's debt crisis fuelled worries that the global recovery was in jeopardy.

In late trading, the Dow Jones Industrial Average fell 2.34 per cent and the Standard & Poor's 500 Index dropped 2.43 per cent. The Nasdaq Composite declined 2.72 per cent.

Among the most active were Caterpillar, General Electric, ConocoPhillips and Exxon Mobil.

"Investor uncertainty is leading to a flight to quality and safe havens," Peter Dixon, an economist at Commerzbank, told Reuters.

"Dumping stocks seems sensible with so much uncertainty on the macro environment, and all fundamental ways of looking at value are out of the window."

More Americans unexpectedly filed applications for unemployment benefits last week, showing firings remain elevated even as employment climbs, figures from the Labor Department also showed overnight.

Initial jobless claims rose by 25,000 to 471,000 in the week ended May 15, exceeding the median forecast of economists surveyed by Bloomberg News and the highest level in a month.

The Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street's 'fear gauge', soared 24 per cent to 43.80.

The Stoxx Europe 600 Index slid 2.2 per cent to 238.28, the lowest close since May 7. The gauge has fallen 5.2 per cent over the past two days as Germany 's unilateral ban on some bets against government bonds and financial institutions triggered selling.

In less than two weeks the Stoxx 600 has erased almost all of the gains that followed the EU's unveiling of a 750 billion euro loan package earlier this month. The gauge has fallen 12 per cent from this year's peak on April 15.

"The market is in a vortex of horrific uncertainty," David Buik, a London-based market analyst at BGC Partners, wrote in an email to clients, according to Bloomberg News. "Every single asset class has fallen."

The U.K. 's FTSE 100 declined 1.7 per cent and Germany 's DAX slid 2 per cent. France 's CAC 40 fell 2.3 per cent.

The VStoxx Index, a measure of the cost of protecting against declines in the Euro Stoxx 50 Index, surged 11 per cent to 49.87, the highest close since February 2009.

Among the most active stocks were Rio Tinto Group, National Grid and British Airways.

BofA Merrill Lynch strategists lowered their recommendation for European basic-resource companies to "neutral" from "overweight" as analysts downgraded at least six mining companies, including Rio Tinto and Xstrata, Bloomberg reported.

The brokerage also reduced its recommendation for three steelmakers, including ArcelorMittal and Kloeckner & Co. SE. Kloeckner's shares slid 6.3 per cent.

The Dollar Index, which measures the greenback against a basket of six major currencies, dropped 0.58 per cent to 85.65.

The euro rose against the US dollar, erasing an earlier loss, as speculation the Swiss National Bank sought to support the franc fanned rumours the European Central Bank might do the same for the shared currency.

The euro earlier traded near a four-year low against the greenback and slid to the lowest level since November 2001 against the yen. The yen rose against all its most-traded counterparts.

"There have been rumours of intervention by central banks," David Rolley, co-head of global fixed-income in Boston for Loomis Sayles & Co, told Bloomberg.

"Most of the movement you've seen has been weaker commodities, weaker emerging market currencies and weaker commodity currencies, all correlated with the belief that the recovery may not be as strong as previously expected."

The euro rose 1.2 per cent to US$1.2565 after earlier falling as much as 1 per cent to US$1.2297.

The euro dropped as much as 3.8 per cent to 109.51 yen, the lowest level since November 2001, before trading at 113.20 yen at 3.02pm in New York.

"Every European Union member has a central banker and a finance minister and all are opening their mouths. But unfortunately, there is no coordinated response to this crisis and this has hurt the euro," Ron Simpson, director of currency research at Action Economics in Tampa, Florida, told Reuters.

The discord was most apparent the last two days when German Chancellor Angela Merkel said on Wednesday that the euro was in danger. "Every one of us here can tell that the currency crisis in the euro is the greatest challenge that Europe has faced (in) decades," Merkel said.

US Treasuries rose, pushing the 10- year note's yield to the lowest level this year, as concern that Europe's sovereign-debt crisis is worsening boosted the appeal of the relative safety of US bonds.

The benchmark note's yield may drop to 2.5 per cent as investors lose confidence in some European nations' ability to repay their debts, Royal Bank of Scotland Group Plc said.

The 10-year note yield decreased 12 basis points, or 0.12 percentage point, to 3.25 per cent at 2.28pm in New York, according to BGCantor Market Data. Thirty-year bond yields fell 12 basis points to 4.12 per cent.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, fell 1.02 per cent to 250.07.

US crude for June delivery fell US$2.14 to US$67.73 a barrel by 1428 GMT in volatile trade on the day of its expiry, falling below the near eight-month low hit the previous day. The June contract has fallen in eight out of the last ten trading sessions.

ICE Brent futures were down US$3.33 at US$70.36 a barrel by the same time.

Spot gold was bid at US$1,187.35 an ounce at 1524 GMT, against US$1,190.75 late in New York on Wednesday.