(Updates with U.S. close)
By Kristina Cooke
NEW YORK, Jan 11 (Reuters) - World stock markets fell
sharply on Friday, as concerns of more fallout from the
subprime mortgage crisis and signs of a slowdown in consumer
spending stoked investor fears of a U.S. recession.
Meanwhile, U.S. government bonds rose on the concerns about
the economy and increasing expectations of a steep interest
rate cut by the Federal Reserve later this month.
Recession worries also sent the price of oil lower, while
spot gold prices surged to a record high just shy of $900 an
ounce amid rate cut expectations.
Mounting credit card defaults at U.S. companies, such as
American Express Co <AXP.N>, dragged down shares of
consumer-oriented companies across the board, from fast-food
chain McDonald's Corp <MCD.N> to luxury jeweler Tiffany & Co
<TIF.N>.
Also on Friday, a New York Times report that Merrill Lynch
<MER.N>, the world's biggest brokerage, is expected to suffer
$15 billion in losses compounded concerns that more credit
crisis fallout may lie ahead. For details, see []
"The markets right now are very much in recession
mentality," said Fred Dickson, director of retail research at
D.A. Davidson & Co in Lake Oswego. "Consumers were not expected
to spend much and they spent even less than that."
The Dow Jones industrial average <> ended down 246.79
points, or 1.92 percent, at 12,606.30. The Standard & Poor's
500 Index <.SPX> was down 19.28 points, or 1.36 percent, at
1,401.05. The Nasdaq Composite Index <> was down 48.58
points, or 1.95 percent, at 2,439.94.
The yen rose broadly on Friday as renewed fears of further
subprime mortgage-related writedowns in the U.S. financial
sector eroded investors' appetite for risk.
Low-yielding currencies tend to attract investors during
periods of uncertainty as low interest rates reflect the
capital surplus in their respective countries.
In late afternoon trading, the dollar was down 0.4 percent
against the yen to 108.88 yen <JPY=>. The euro also dropped
versus the yen to 161.15 <EURJPY=>, down about 0.5 percent.
European stocks ended lower after briefly touching their
lowest level in over a year as concerns the U.S. subprime
crisis may be far from over dampened the mood among investors.
The FTSEurofirst 300 index <>, already under pressure
in the previous session as both the European Central Bank and
the Bank of England kept rates on hold, dipped 0.5 percent.
Japan's benchmark Nikkei <> earlier fell to its lowest
closing level since November 2005.
TREASURIES TREK HIGHER
Recession fears and the stock market losses sent investors
seeking the relative safety of U.S. government debt. U.S.
government bond prices jumped on Friday, and yields fell to
their lowest levels since 2004, helped also by growing
certainty of a hefty interest rate cut this month
The yield on the 2-year Treasury note <US2YT=RR>, which
responds closely to interest rate expectations, slipped to 2.60
percent, its lowest since November 2004.
The benchmark 10-year Treasury note traded up 11/32 in
price, while its yield fell to 3.846 percent <US10YT=RR>, its
lowest level since March 2004. Bond yields and prices move
inversely.
The credit worries overshadowed comments made by Federal
Reserve Chairman Ben Bernanke on Thursday, acknowledging the
U.S. economy faced increased risks and indicating the Fed was
ready to cut interest rates aggressively to support growth.
Bernanke, however, fueled hopes for more aggressive U.S.
rate cuts, helping to drive spot gold to a fresh record high.
The possibility of more financial trouble, ahead of key
results in the U.S. banking sector next week, also kept assets
traditionally seen as safe-haven underpinned.
As well as Merrill, big names such as Citigroup <C.N>,
State Street <STT.N>, US Bancorp <USB.N> and JP Morgan <JPM.N>
report results next week.
Investors will be looking closely at the results to see how
the recently downbeat sector is faring, especially as recent
data, such as last week's key U.S. jobs data, has fueled fears
the United States, the world's largest economy, may be on the
brink of recession.
Such concerns have even knocked oil prices off last week's
record highs of just above $100 a barrel. U.S. crude last
traded at $92.47 a barrel.
Some analysts say the only solution is further rate cuts
but even Bernanke's comments weren't enough to comfort nervous
investors.
"While Bernanke appeared to be in a generous mood in terms
of prospects for cutting rates, market psyche is such at
present that the general take is that his turnaround must
suggest that he knows something that we all don't, i.e., that
the U.S. economy is in much worse shape than we have all been
hitherto assuming," Bear Stearns said in a client note.
