LONDON, March 25 - Fears of a prolonged, messy war in Iraq rocked financial markets for a second day in a row on Tuesday, battering stocks, boosting oil prices and hitting the dollar. Gold rose as much as $4.50 an ounce and bond prices jumped, knocking down their yields sharply, as investors sought safe havens.
Governments across the world were also beginning to count the cost of the war. U.S. President George W. Bush was seeking $75 billion in emergency funding. Investors' hopes for a quick end to the war have been sinking fast amid graphic pictures of captured and dead U.S. soldiers, fierce resistance from Iraqi troops, and a tough battle for Baghdad looming. The mood is a complete about-face from the past few weeks when stock markets rallied and safe-haven positions were dropped in a "relief rally" over the end of uncertainty about the start of the war and a view it would be over swiftly.
"What's happening in all these markets is that we are seeing a rethink about the war," said Nicole Elliott, technical analyst at Mizuho Corporate Bank. "This means we are back to the long-term trend of lower (bond) yields, a weaker dollar, and weaker stocks."
STOCKS TUMBLE, OIL CLIMBS
European shares tumbled around two percent, adding to losses of as much as 5.5 percent on Monday. The FTSE Eurotop 300 index <.FTEU3> was down 1.85 percent percent and the narrower DJ Euro Stoxx 50 <.STOXX50E> shed 2.1 percent. Dealers were also braced for more losses on Wall Street to add to the Dow's 3.6 percent sell off on Monday. U.S. equity futures were indicating an opening fall of about 50 points. "The news coming out of Iraq hasn't improved and with the dollar weak and oil prices rising, the two or three elements that supported us last week are turning in the opposite direction," said Gert de Mesure of Delta Lloyd Securities.
Japanese stocks earlier ended down by over two percent. The benchmark Nikkei average <.N225> fell 2.33 percent or 196.31 points to 8,238.76, wiping out most of a 2.93 percent rally in the previous session. The broader TOPIX <.TOPX> fell 2.30 percent to 812.29. "The risk that the war in Iraq gets bogged down, bad debts, deflation - right now I can't think of many reasons for stocks to go up but there are plenty of reasons to go down," said Koji Muneoka, head of domestic sales trading at HSBC.
Oil prices built on Monday's gains and last week's four- month lows, although they were still well off recent near $40- a-barrel highs. Prices were also driven up by tribal violence in Nigeria which has cut that country's crude output by 40 percent. The price of oil has been of particular concern to markets in the run up to war because of the damaging effect increases can have on the stuttering global economy. U.S. light crude was up 74 cents to $29.40 a barrel, extending Monday's $1.75 jump. London's Brent crude climbed 76 cents to $26.85 a barrel. "The market is responding to difficulties in the Iraq campaign. It had priced in the perfect war and had gone so far as building in a victory discount, which is now being eroded," Sydney-based oil analyst Simon Games-Thomas said.
SEARCH FOR SAFETY
Concerns the war could last longer than initially expected boosted traditional safe-haven investments like government bonds and gold for a second straight day. The two year Schatz yield was 3.7 basis points lower at 2.52 percent, while benchmark 10-year Bund yields were 5.4 basis points down at 4.15 percent. Yields on the 10-year U.S. Treasury fell 3.7 basis points to 3.93 percent. Spot gold traded at $333.50/334.50 an ounce, up from $329.50/0.25 at Monday's close in New York. On the foreign exchange market, the dollar fell to its lowest level on the euro and other major currencies since the start of the war.
The dollar was down more than half a percent on the day against the euro at $1.0712 and the Swiss franc at 1.3739 francs . It slid around one percent against the yen, below 120 yen , after yen bears were disappointed the Bank of Japan took no radical steps to tackle deflation and weaken the Japanese currency at an emergency meeting on Tuesday. "While progress is still being made it's quite clear there is significant Iraqi resistance and the government in Iraq is not going to collapse as quickly as initially hoped. That's pressuring the dollar across the board," said Shahab Jalinoos, currency strategist at UBS Warburg in London//