Stocks, oil, gold and the euro all fell on Wednesday, as sky-high borrowing costs for Italy fed fears of Europe's debt crisis spinning out of control.
The Federal Reserve's decision to do nothing new to support growth despite warning that Europe's debt crisis could hurt the U.S. economy added to a rush into less risky U.S. and German government bonds.
Global equity markets fell for a third straight day and the euro hit its lowest level in 11 months. Oil and gold prices were on track for their biggest one-day drop since late September.
"The main issue right now is the complete, absolute failure of the European Union to come to any kind of solution. They're back to where they started from," said Jeffrey Sica, president and chief investment officer of SICA Wealth Management in Morristown, New Jersey.
The Dow Jones industrial average .DJI fell 131.46 points, or 1.10 percent, to end at 11,823.48. The Standard & Poor's 500 Index .SPX lost 13.91 points, or 1.13 percent, to finish at 1,211.82. The Nasdaq Composite Index .IXIC dropped 39.96 points, or 1.55 percent, to close at 2,539.31.
An index of top European stocks .FTEU3 lost 2.1 percent, while Tokyo's Nikkei .N225 closed down 0.4 percent.
A Morgan Stanley index of global stocks .MIWD00000PUS slid 1.6 percent.
Investors were disappointed that the Fed showed no new urgency after its Tuesday meeting to launch more stimulus programs to counter a likely economic drag from the European debt crisis.
The euro was down 0.4 percent against the U.S. dollar at $1.2979. It broke below $1.30 for the first time since January after Rome's auction of five-year debt, with foreign- exchange markets still speculating that more rating downgrades were in prospect for euro zone governments.
The 17-member euro zone's currency is about 10 cents above its average New York closing levels going back to January 1999, when it first began trading, according to Reuters data.
"The problem hasn't been solved, so why would you want to buy the euro?" said Ronald Simpson, director of currency research at Action Economics in Tampa, Florida. "The problem is that nobody knows how this is going to end, including the politicians and policymakers."
German Chancellor Angela Merkel told parliament on Wednesday tougher budget discipline is needed to deal with the euro zone's debt crisis, which she reckons might take years -- not weeks --to resolve. Her remarks came after last week's EU summit, which investors concluded did not produce a comprehensive solution to keep the crisis from worsening.
Debt-laden euro-zone members are paying dearly for the political quagmire. Italy paid 6.47 percent at a five-year note auction on Wednesday. That was a euro-era record high for a five-year Italian sale, breaching the previous auction peak of 6.3 percent set in November.
On the other hand, Germany raised 4.2 billion euros in a two-year debt auction that fetched a euro-era record low yield of 0.29 percent, down from 0.39 percent at the last such auction.
Strong demand at the two-year German note sale and 30-year U.S. Treasury bond auctions on Wednesday underscored how desperate investors are to find a safe haven for their money.
The benchmark U.S. 10-year Treasury note rose 18/32 in price to yield 1.90 percent, the lowest in three weeks.
The dollar index .DXY, which tracks the greenback's value against a basket of currencies, was up for a third straight day to its highest since January. It finished up 0.4 percent at 80.555, slightly off its earlier highs.
Investors' flight into the dollar and less risky bonds resulted in heavy losses in oil, gold and industrial commodity prices on worries about a slowing global economy.
Copper in London closed down 5 percent at $7,222.75 a tonne, a two-week low, while Brent crude closed down 4.1 percent, or $4.48, at $105.02 a barrel. U.S. January oil futures settled at $94.95 a barrel, down $5.19, or 5.2 percent.
Gold fell 3.9 percent to $1,566.79 an ounce, its lowest since late September, after the euro's decline encouraged more non-U.S. investors to take profit on their bullion holdings.
It was a brutal day for stocks, commodities and other risk assets, and particularly brutal for gold which sunk to a three month low, breaking its 200-day average. Only bonds, the most misunderstood asset class, rallied sharply as investors fled to safety.
So what happened to La Dolce Beta and all that money for nothing and risk for free? Why are money managers running scared? Are surging hedge fund redemptions causing widespread indiscriminate selling? Why are we talking endlessly about Europe? Are we on the cusp of another financial crisis?
I don't know. All I know is that money managers are running scared, depressed, despondent, sheep hugging their benchmarks closely, petrified of losing their job. Once again, asset allocators are de-risking their portfolios at the worst possible time. Everyone is scared of "Europe imploding" and another "Lehman type event". Maybe they all just want this year to end on a whimper so they can scoop up shares on the cheap in Q1 2012.
I don't know and I don't care. They are all a bunch of incompetent, overpaid cowards who don't deserve to get the fees they're charging. Not just hedge funds, most money managers. Mark my words, greed will replace fear and when it does, watch out because these markets are going to be off to the races again.
And if I see Kyle Bass on Zero Hedge one more time warning us on rehypothecation and other Keynesian endgame scenarios, I"m seriously going to lose it! What the hell, since you are all so doom & gloom, waiting for the end of the world, keep selling risk assets and listening to Kyle Bass rants (watch below). I'm not fighting central banks, and remain long risk assets, long solar stocks, waiting for another melt-up. But I'm short gold, short Kyle Bass, short Jim Chanos, and pretty much short anyone or anything Zero Hedge shills for!!!