Investors dump stocks as bailout hits snag — Gold climbs 4% as yen gains 1.6% against dollar

NEW YORK: Stalled negotiations over Washington’s proposed bailout of the US financial sector sapped global stocks and lifted safe-havens yesterday as the crisis kept tight money markets under enormous stress.

Gold jumped 4 percent and the yen climbed broadly as investors piled into safe assets after talks on the bailout of troubled banks dragged on and the failure of Washington Mutual, the biggest bank closure in US history, gnawed at confidence.

Investors flocked to cash and US and euro-zone government debt. Renewed jitters also sparked bets the Federal Reserve may slash key interest rates by as much as half a percentage point from the current 2 percent by year-end, according to interest rate futures.

Investors sold high-yielding currencies such as the Australian dollar and dumped stocks around the world. “There is risk aversion at the moment and there is a huge amount of uncertainty and that’s why we’re seeing gold rally and the yen being the strongest performer across the board,” said Shaun Osborne, chief currency strategist at TD Securities in Toronto.

Central banks injected fresh liquidity into the global banking system, helping lower soaring inter-bank borrowing rates, but money markets remained mostly paralyzed. While investors continued to voice expectations that the US Congress will approve a bailout package, European and US equity markets again fell sharply and oil prices, along with the US dollar, slipped amid widespread uncertainty. Market jitters again hit Belgian-Dutch bank Fortis even after it denied it was facing a liquidity crisis. Fortis said it has a funding base of 300 billion euros and solid solvency ratios, but its shares plunged 20 percent to a 15-year low.

“Money markets are more seized up than ever, liquidity issues are more prevalent than ever,” said Bernard McAlinden, strategist at NCB Stockbrokers in Dublin. “So severe is the crisis of confidence that any bank that has funding or leverage issues, quite apart from the quality of assets, is unnaturally vulnerable in the current environment.” “So severe is the crisis of confidence that any bank that has funding or leverage issues, quite apart from the quality of assets, is unnaturally vulnerable in the current environment,” he said.

Across the Atlantic, the collapse of the largest US thrift, Washington Mutual, heightened concerns about the widening fallout of the credit crisis, as did fresh data on second-quarter US gross domestic product that revised downward the government’s prior growth estimate. Wachovia Corp , a large US bank, was among financial shares taking a knock, falling more than 28 percent on worries about heavy mortgage losses.

Before 1 p.m., the Dow Jones Industrial Average was down 28.99 points, or 0.26 percent, at 10,993.07. The Standard & Poor’s 500 Index was down 12.68 points, or 1.05 percent, at 1,196.50. The Nasdaq Composite Index was down 27.41 points, or 1.25 percent, at 2,159.16.

Technology shares took a heavy blow after Research In Motion, the BlackBerry maker and a tech bellwether, warned that quarterly profit will fall short of Wall Street’s forecasts. Its shares slid more than 26 percent.

The US economy grew less strongly than previously thought in the second quarter as consumers boosted spending less vigorously and businesses trimmed some investments, a sign of a dimmer outlook even before the financial crisis deepened.

The FTSEurofirst 300 index of top European shares ended down 1.8 percent at 1,104.79 points, with banks taking the most points off the index. The pan-European index fell 4 percent for the week, and is off nearly 27 percent so far this year. Miners tracked metal prices sharply lower.

Government debt prices fell. The price of two-year Treasury notes, the maturity that garners the most safety bids, was up 8/32 for a yield of 2.044 percent. The benchmark 10-year US Treasury note was up 14/32 to yield 3.81 percent.

The dollar fell. The yen has gained 1.6 percent against the dollar so far this week and about 3 percent this month amid heightened pressure in financial markets. The dollar fell 0.23 percent at 106.16 against the yen, and the euro rose 0.08 percent at $1.4609. The dollar rose slightly against major currencies, with the US Dollar Index up 0.02 percent at 77.019.

Oil also fell, pressured by concerns over the financial market crisis. Further pressure came as investors, who flocked into oil and other commodities earlier this year as a hedge against inflation and a weak dollar, shift into safer havens.

US light sweet crude oil fell $2.81 to $105.21 a barrel.

Spot gold prices rose $10.50 to $886.20 an ounce. “The main driver right now is the dollar, but also risk aversion,” said analyst Barbara Lambrecht at Commerzbank in Germany.

Asian stocks overnight fell. Japan’s Nikkei share average shed 0.9 percent, and the MSCI index of Asia-Pacific stocks outside Japan fell 1.7 percent.