By Daniel Bases
NEW YORK, Feb 5 (Reuters) - Recession fears sent global
stock markets lower and lifted safe-haven government bonds on
Tuesday after reports in the United States and Europe showed
the vast services sector economy weakened sharply in January.
Concerns the U.S. credit crisis is spreading beyond
mortgages to consumer credit compounded fears of weaker global
growth.
In the United States, the steep drop in the Institute for
Supply Management's index of non-manufacturing industry to
levels not seen since the 2001 recession amplified the negative
mood and increased recession fears in the world's largest
economy.
"It's another recession marker on the radar screen," said
Cary Leahy, economist at Decision Economics in New York.
The Dow Jones industrial average <> lost 368.32 points,
or 2.92 percent, at 12,266.84. The Standard & Poor's 500 Index
<.SPX> fell 43.76 points, or 3.17 percent, to 1,337.06, and
the Nasdaq Composite Index <> shed 73.28 points, or 3.08
percent, to 2,309.57.
"The decline today reflects a market that's completely
driven by fear," said Scott Wren, senior equity strategist at
A.G. Edwards & Sons Inc.
U.S. blue chip stocks were hit with late selling after
Fitch Ratings said more losses and rising capital requirements
for U.S bond insurers may put further downward pressure on
their ratings.
The negative economic news started in Europe, where reports
showed euro zone service sector growth slowed significantly
last month from an already weak estimate and retail sales fell
in the key Christmas period.
Surveys of purchasing managers showed Germany's service
sector contracted for the first time in 4-1/2 years in January.
Service sectors in Spain and Italy also shrank and overall euro
zone services growth decelerated to a virtual standstill.
Asian stocks began the global trading day with steep losses
on concerns the U.S. credit crisis is spreading beyond
mortgages to consumer credit after downgrades on Monday to U.S.
financial institutions. Analysts pointed to U.S. consumers
falling behind on loan payments, and the stocks of financial
companies, including American Express Co, Wachovia Corp and
Wells Fargo & Co, fell both days in New York trading.
Oil prices fell and gold lost ground, while the U.S. dollar
was broadly higher, boosted by the weakness in the euro
following the anemic euro zone services data.
The outlook on the U.S. economy is dour despite interest
rate cuts totaling 2.25 percentage points in the Federal
Reserve's benchmark fed funds rate since September to spur
economic growth.
Following the ISM report, short-term interest rate futures
fully priced a 50-basis-point cut from the Fed at its next
meeting on March 18 and started to factor in a small chance of
a 75-basis-point rate cut. The current rate is 3.0 percent.
U.S. Treasury debt prices rose. The benchmark 10-year U.S.
Treasury note <US10YT=RR> gained 20/32, with the yield at 3.568
percent. Yields move inversely to prices.
The euro zone benchmark 10-year government bond was higher,
its yield down to 3.84 percent <EU10YT=RR>.
Europe's FTSEurofirst 300 stock index <> closed down
3.09 percent, while the MSCI world equity index <.MIWD00000PUS>
lost 3.05 percent.
Japan's Nikkei stock index <> lost 0.8 percent, with
Honda Motor Co Ltd pressured by the U.S. recession fears.
VOLATILE MARKETS
The sharp drop in European data "played straight into the
hands of the euro bears, supporting their argument that the ECB
will not be able to remain hawkish much longer and will have to
follow the Fed by lowering rates relatively soon," said Boris
Schlossberg, chief currency strategist for DailyFX.com.
The European Central Bank is not expected to trim interest
rates from 4 percent at its policy meeting on Thursday.
However, speculation it may be forced to cut sooner than
currently forecast sent the euro <EUR=> down 1.25 percent, to
$1.464, from a previous session close of $1.4825.
Against the Japanese yen, the dollar <JPY=> was up 0.11
percent at 106.82 from a previous session close of 106.70.
A sharp rise in the dollar against the euro triggered
selling in the spot gold <XAU=> market, pulling it down $17.55,
or 1.94 percent, to $886.85 an ounce.
The market volatility came on the biggest day in U.S.
presidential nominating contests, known as Super Tuesday.
Twenty-four of the 50 states were holding nominating
contests for the Democratic and/or Republic parties, and at the
end of the day there could be clear winners for the final run
to the November presidential election.
Weak markets and rising recession fears will top the agenda
at the Group of Seven finance ministers and central bank
governors meeting in Tokyo on Saturday.
In energy and commodities trading, U.S. light sweet crude
oil <CLc1> fell $1.83, or 2.03 percent, to $88.19 per barrel,
and spot gold prices <XAU=> fell $17.55, or 1.94 percent, to
$886.85.
Recession fears pushed copper prices down 2.77 percent
<HGH8>.
(Additional reporting by Mike Dolan in London, Pedro Dacosta,
Burton Frierson, and Ellis Mnyandu in New York; Editing by Dan
Grebler)
