(Updates prices)
By Ian Chua
LONDON, Jan 23 (Reuters) - Persistent worries about a U.S.
recession undid the boost that Tuesday's surprise U.S. interest
rate cut gave to global markets, sending European stocks lower
on Wednesday and setting the scene for a fall on Wall Street.
Safe-haven government bonds and the yen, which tends to rise
as investors pare risky trades, gained ground, while commodities
including oil sagged on nagging fears that demand will be hurt
by slower global growth.
"The recovery in risk appetite after the Fed cut was only
temporary," said Niels From, currency strategist at Dresdner
Kleinwort in Frankfurt.
"After digesting the news, markets have come to the
conclusion that it will not resolve problems in the U.S. economy
and this is weighing on the carry trade, supporting funding
currencies like the yen."
The Federal Reserve on Tuesday slashed its key federal funds
rate by 75 basis points -- the largest cut in more than 23 years
-- to 3.50 percent a week ahead of its scheduled meeting,
underscoring the risks facing the U.S. economy.
Investors believe a lot more needs to be done by the Fed to
shore up the U.S. economy, which some see on the brink of
recession, hit by a slumping housing market and tight credit
conditions. Markets have priced in a further 50 basis point rate
cut at next week's Fed meeting. <FEDWATCH>
After rising as much as 1.6 percent, the FTSEurofirst 300
<> index of top European shares reversed direction to be
down 1.7 percent with Germany's DAX <> falling 2.7
percent.
Worries about profits and bad debt write downs were taking a
toll on banks such as Societe Generale <SOGN.PA>.
London's FTSE <> lost 1.5 percent in choppy trade after
data showed Britain's economy grew slightly faster than expected
in the final quarter of 2007. []
This followed a 2 percent rebound for Japan's benchmark
Nikkei <> and a 4.5 percent rally for MSCI's measure of
other Asian stock markets <.MIAPJ0000PUS>.
Commodities looked vulnerable with copper <MCU3> down
slightly on the London Metal Exchange, while U.S. crude <CLc1>
fell about $1 to $88.24 a barrel.
"The Fed's move implied that the problems in the system are
much worse than we expected," said Eugen Weinberg at Commerzbank
in Germany.
The MSCI world equity index <.MIWD00000PUS> wiped out almost
all of the gains made earlier to be flat. It was still off a
near 15-month trough plumbed a day earlier and down nearly 13
percent this year.
Suggesting a weak opening for Wall Street, U.S. stock
futures <SPc1><DJc1><NDc1> were all lower.
BONDS, YEN UP
Underlying worries about the global economy kept a bid tone
for Euro zone government bonds. The March Bund futures <FGBLH8>
advanced 88 ticks to 116.95.
The 10-year Bund yield <EU10YT=RR> slipped to 3.91 percent,
while the benchmark U.S 10-year Treasury yield <US10YT=RR> fell
to 3.40 percent, after earlier dipping below 3.4 percent for the
first time since mid-2003.
In the currency market, the dollar shed 0.6 percent against
the yen to 105.78 <JPY=> on the day, while the euro slid 1
percent to 154.24 yen <EURJPY=>. The euro fell 0.3 percent
versus the dollar to $1.4582.
Earlier, data showed Euro zone services growth slumped
significantly to below forecasts to a rate not seen in over 4
years this month, adding to the case for an interest rate cut by
the European Central Bank, some analysts say.
But ECB President Jean-Claude Trichet told legislators the
ECB needed to stay focussed on fighting inflation in the face of
a very significant market correction. []
(Editing by David Christian-Edwards)
