Central Bank fears trigger global selloff in bonds, shares

By Richard Hubbard

LONDON (Reuters) - The yen rose while shares, bonds and gold fell on Tuesday as investors retreated into cash, unnerved by fears that major central banks are cooling in their commitment to the money-pumping that has buoyed global markets.

The selloff was triggered in Tokyo when the Bank of Japan left its policy unchanged, refraining from any fresh measures to tackle rising government bond yields that threaten to thwart its $1.4 trillion stimulus programme.

Traders also noted nervousness about a German Constitutional Court hearing on the legality of the European Central Bank's bond-buying scheme, which added to long-running fears over the U.S. Federal Reserve winding down its stimulus plan.

By the end of the European morning session, the broad FTSEurofirst 300 index had lost 1.5 percent to be at a six week low. The dollar had sunk as much as two percent against the yen to be near 98.50 yen, and German 10-year bond yields had risen 4 basis points to 1.59 percent.

Gold was down 1 percent, close to a three-week low at $1,371.11 an ounce, while U.S. stock index futures pointed to further weakness ahead for Wall Street.

The selloff encompassed traditional safe havens and riskier asset classes. "This is by no means an indication the markets are entering a new downturn," said Viktor Nossek, head of research at Boost ETP, an exchange traded products provider.

"This is seasonal and sentiment driven. We're entering summer and markets have seen good year-to-date gains, so people are taking this opportunity to sell," he said.

BOJ SPARK

However, the selling was led by a sharp fall in the dollar which followed the BOJ's decision to refrain from taking additional measures to curb recent bond market volatility at its regular monthly policy meeting.

BOJ Governor Haruhiko Kuroda did subsequently try to reassure the markets the central bank would consider fresh steps if yields spike again in the future, but the decision rattled many foreign investors.

"There were some expectations that the BOJ would curb bond market volatility and that has not happened," said Chris Walker, currency strategist at Barclays.

In the selloff that followed, the euro lost over 1 percent against the resurgent Japanese currency to be at 128.70 yen. But it firmed against the weaker dollar to be just under $1.33 and near a 3-month high.

Japan's Nikkei index closed down 1.5 percent, though this followed Monday's 4.9 percent gain, while MSCI's broadest index of Asia-Pacific shares outside Japan tumbled 1.1 percent to hit a 6-1/2-month lows.

The selling spread across emerging shares as well, sending MSCI's benchmark index to a nine-month low and extending losses caused by political tensions in Turkey and worries about China's slowing economy.

MSCI's world equity index, which tracks shares in 45 countries, shed 0.4 percent to end three days of gains.

DEBT NERVES

Debt investors pulled out of some of the riskiest assets in the euro area with Greek 10-year bond yields suffering their worst daily loss over a year, rising a full point to stand at 10.66 percent.

The Greek government's failure to find buyers for the state-owned natural gas company, threatening a bailout goal of privatisation, piled on the pressure.

Safe haven debt also took a hit with U.S. Treasury yields touching their highest levels in more than a year. The benchmark 10-year note rose 4.5 basis points to 2.26 percent.

The concerns over China weighed on commodity markets and Brent crude dropped $1.35 at $102.60 a barrel, while copper traded near a one-month low at $7,082 a tonne.

(Editing by Ruth Pitchford)