Nikkei Plunges 10.6% as Hedge Funds Flee Market on Radiation Fears

Mutual funds left holding the bag as bond yields rise

Nuclear fallout spurred financial fears as Japan’s Nikkei saw its largest two-day drop since 1987 on Tuesday. Losing an additional 10.6%, or 1,015.34 points, on top of Monday’s losses of 6.2%, the Nikkei share average, which closed at 8,605.15, was hammered by the mass rout of hedge funds, which beat mutual funds to the exits.

Record market volumes left mutual fund managers in the dust, and one unidentified manager said in a Reuters report, "Even if we wanted to sell today there was very little we could do. We didn't sell and waited, sidelined because hedge funds were just dumping stocks in panic." Yields on government bonds rose as investors had to sell to offset losses. In an effort to stem the tide of panic, the Japanese central bank added another $98 billion to the money markets, after a cash injection on Monday of $184 billion.

The TOPIX index of Japanese stocks fell 16.3% this week, its worst two days since the crash in October of 1987. At one point the Nikkei was down 14%, after Prime Minister Naoto Kan said that nuclear contamination risk was rising at Fukushima Daiichi on the northeastern coast. The drift of radiation was headed for Tokyo.

While construction and homebuilding stocks had risen on Monday in expectation of the huge quantity of rebuilding that would be necessary to repair the damage caused by the catastrophic quake and tsunami, on Tuesday all 225 benchmark Nikkei stocks fell. Kajima Corp., a construction company that had seen its shares buoyed on Monday, lost 13% in trading.

Hideyuki Ishiguro, a supervisor at Okasan Securities in Tokyo, said in the report, "All focus is on the nuclear crisis. Foreign investors and domestic fund operators are pulling out from Japanese shares." Overseas hedge funds, according to traders, were most aggressive in the sellout, particularly Singapore-listed contracts.

The first section of the Tokyo Stock Exchange, made up of Japan’s largest companies, saw its market capitalization go down by approximately $626 billion this week; its volume, at 5.77 billion shares, was up about 20% over Monday’s record.

Other Asian markets did not follow the panic selling but were all down, though less than the Hang Seng’s 2.86% loss. European markets closed down sharply, though, with the DAX down the most at nearly 3.19%, the CAC 40 off 2.51%, the FTSE Eurofirst down 2.07% and Britain's FTSE was down the least at 1.38%.

The U.S markets did not feel the same bite as other market across the globe. The Dow was down 137.74 points, or 1.15%, to 11,855.42, while the S&P 500-stock index dropped 14.52 points, or 1.12%, to 1,281.87. The Nasdaq lost 33.64 points, or 1.25%, to 2,667.33.

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