(Adds close of U.S. markets)
* Major U.S. stock indexes fall, weighed by banking shares
* Dollar falls as U.S. housing starts plunge in May
* Oil eases amid reconsideration of Saudi output plans
By Herbert Lash
NEW YORK, June 17 (Reuters) - The American housing slump
and global credit crunch came back to haunt investors on
Tuesday, pushing U.S. stocks and the dollar lower and lifting
government debt prices in a flight to safer yields.
Shares of U.S. banks sold off across the board after
analysts at Goldman Sachs said the sector may need to raise $65
billion of additional capital to cope with mounting losses from
a credit crisis that they do not expect to peak until 2009.
The dollar slid after U.S. housing starts plunged to their
lowest level since the last U.S. recession in the early 1990s,
while U.S. Treasury debt rallied as press reports indicated the
Federal Reserve is not set to raise interest rates soon.
Oil prices also slid, falling further from record highs on
Monday, as investors took note of plans by top exporter Saudi
Arabia to boost crude output to help curb soaring fuel costs.
In a harbinger of higher inflation ahead, U.S. corn, wheat
and soybean prices rallied sharply as flooding in the U.S.
Midwest hurt crop prospects and Argentine farmers kept up their
protests against a government tax on soy exports.
The inflation worries are compounding the already difficult
credit outlook, as rising prices put damper on the ability of
central banks to ease tight credit. Central banks have
indicated in recent days that they will go slow on raising
rates with economies in a relatively fragile state. The U.S.
Federal Reserve meets next week to decide rate policy.
"The market is unlikely to go higher without participation
from financial stocks. You have funding and write-down issues
with the financials," said Subodh Kumar, chief investment
strategist at Subodh Kumar & Associates in Toronto.
The KBW <.BKX> index of leading U.S. banks fell 3.7
percent, with all 24 shares posting declines, after Goldman
analysts lowered price targets on 14 banking companies and cut
2008 earnings-per-share forecasts for 11 banks.
Bank of America <BAC.N> fell 3.6 percent to $29.24 and its
shares were the biggest drag on the benchmark Standard & Poor's
500 Index. Insurer American International Group <AIG.N> fell
4.3 percent after it announced it was cutting back its mortgage
related business.
U.S. stocks initially rose after Goldman Sachs Group Inc
<GS.N> posted quarterly profits that exceeded expectations by
avoiding major losses on assets slammed by the credit crisis.
The Dow Jones industrial average <> fell 108.78 points,
or 0.89 percent, at 12,160.30. The S&P 500 <.SPX> slipped 9.21
points, or 0.68 percent, at 1,350.93. The Nasdaq Composite
Index <> fell 17.05 points, or 0.69 percent, at 2,457.73.
European equities rose as Daimler's plans to resume buying
back up to 6 billion euro ($9.31 billion) in its stock powered
a rally in automaker shares.
Daimler climbed 3.6 percent, pulling the DJ Stoxx European
auto sector index <.SXAP> 2.7 percent higher.
It was the second day financials ended up at odds on either
side of the Atlantic. European banks gained on hopes the worst
might be over for the battered sector.
The FTSEurofirst 300 index <> of top European shares
closed 0.5 percent higher at 1,268.90 points.
Shares were also lifted by miners thanks to firm metal
prices and a newspaper report that China's state-owned aluminum
producer Chinalco was keen to buy a range of global resource
assets.
Rio Tinto <RIO.L>, seen as a potential takeover target,
rose 3.8 percent.
A big jump in energy costs pushed U.S. producer prices up
sharply in May and housing sickened further, underscoring the
Fed's dilemma of tackling weak growth amid high inflation.
Interest rate futures showed the prospect for a Fed hike in
August fell to about 60 percent from 90 percent on Monday.
The benchmark 10-year U.S. Treasury note <US10YT=RR> rose
17/32 to yield 4.21 percent. The 30-year U.S. Treasury bond
<US30YT=RR> added 7/32 to yield 4.78 percent.
The dollar's losses were limited. Traders pared
expectations of tighter monetary policy in the euro zone after
Lorenzo Bini Smaghi, an Executive Board member of the European
Central Bank, said a quarter-point hike might bring inflation
below its target.
The dollar fell against major currencies, with the U.S.
Dollar Index <.DXY> down 0.22 percent at 73.504. Against the
yen, the dollar <JPY=> fell 0.20 percent at 107.97.
The euro <EUR=> rose 0.31 percent at $1.5514.
Debt prices rallied on press reports discussing the outlook
for Fed policy encouraged markets to tone down their
expectations for near-term interest-rate hikes.
"A lot of articles in the past couple of days" seem to be
saying "that the market has placed too much (emphasis) on Fed
rate hikes in months to come," said Sean Murphy, Treasury
trader at RBC Capital markets in New York.
U.S. crude <CLc1> settled down 60 cents at $134.01 a barrel
after hitting a record $139.89 on Monday. London Brent crude
<LCOc1> settled 99 cents lower at $133.72 a barrel.
Gold recovered from session lows to end a touch higher as
buying increased after the dollar softened against the euro
following disappointing U.S. economic data.
Gold <XAU=> last traded at $884.20/885.40 an ounce in New
York.
The MSCI index of stocks in the Asia-Pacific region outside
of Japan also rose three-quarters of a percent <.MSCIAPJ>.
(Reporting by Jennifer Coogan, Lucia Mutikani and Ellen
Freilich in New York and Jane Merriman, Ian Chua and Jan Harvey
in London and Peter Starck in Frankfurt. Editing by Richard
Satran)
(Reporting by Herbert Lash. Editing by Richard Satran)
