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Risk-takers flee markets as economy fears revive

January 20, 2010 | 10:58 am

Renewed fear that the global economic recovery could stall is trumping any joy Wall Street took away from Tuesday’s Republican Senate victory in Massachusetts.

Risk-takers are in a broad retreat worldwide, driving stocks and commodities down and the dollar up.

U.S. stocks are on track for their biggest drop since late November. The Dow Jones industrial average was down 165.28 points, or 1.5%, to 10,560 at about 10:50 a.m. PST, led by commodity and technology issues.

China set the scene for today’s slide: Overnight, the Chinese government took another step to restrain bank lending, trying to head off what many analysts have called an asset bubble fueled by cheap money. But any move to tighten credit raises the potential for a hard landing for China's fast-growing economy, which obviously could have worldwide implications.

Chinaregulator A week ago Chinese authorities ordered banks to increase the reserves they hold. Today Liu Mingkang, chairman of the China  Banking Regulatory Commission, said some banks have been told to limit lending.

"Corrective actions" have been taken against banks that were lending too aggressively, he said.

The government’s latest moves drove the Shanghai composite stock index down 2.9%.

European markets also slumped, hit by fresh worries that Greece will have trouble selling more bonds to finance its yawning budget deficit. That could deal another severe blow to Europe's fragile financial system.

The yield on two-year Greek government notes soared to 4.33% from 3.77% on Tuesday. (The U.S. two-year Treasury note yield, by comparison: a mere 0.87%.)

With investors and traders suddenly looking for shelter, the old standby -- the dollar -- is the day’s big winner. The euro has dropped to a five-month low of $1.411 from $1.429 on Tuesday. As usual, a stronger dollar is drawing money away from commodity markets. Gold is down $27 to $1,113 an ounce.

On Wall Street, which hit new 15-month highs on Tuesday, today’s big losers are stocks tied to the economy’s fortunes. Of the Standard & Poor’s 500 index’s 10 major industry sectors, shares of commodity and energy issues are bearing the brunt of the day’s selling. Not far behind are technology and industrial issues.

By contrast, the sectors holding up the best today are financials and healthcare -- both of which are seen as winners in the wake of Republicans’ capture of the Massachusetts U.S. Senate seat held by the late Ted Kennedy.

With the GOP’s victory, Democrats lost the 60-vote Senate majority needed to block Republican filibusters. That could derail the Obama administration’s plans to reform the healthcare system and banking regulation.

The S&P financial-stock sector was off 0.4% at about 10:50 a.m. PST, compared with a 1.4% loss for the S&P 500 overall. The healthcare stock sector was down 1%.

-- Tom Petruno

Photo: Liu Mingkang, chairman of the China Banking Regulatory Commission. Credit: Jerome Favre / Bloomberg News