(Adds S&P bank downgrades)
* Major U.S., European stock indexes fall more than 1 pct
* Yen rises, sterling down as risk aversion increases
* Credit jitters return, sparking bid for safe-haven bonds
By Herbert Lash
NEW YORK, June 2 (Reuters) - U.S. equity markets fell
sharply on Monday after a UK mortgage lender's bleak outlook
and a Standard & Poor's downgrade of three major U.S. banks
revived credit jitters and sent investors scurrying to safer
securities.
The yen rose broadly, posting its largest single-day gain
against the dollar in nine weeks, while sterling fell as a
warning from Bradford & Bingley <BB.L> reminded the markets
about the lingering impact of the crisis on global economies.
Euro zone government bonds rose and yields retreated on a
safe-haven bid and the yield on the benchmark U.S. 10-year
government note slipped below 4 percent as investors favored
bonds over stocks.
Oil rebounded from sharp initial declines to stand more
than $1 higher at almost $129 a barrel as a rally in natural
gas and refined oil products helped outweigh demand concerns
and a firmer dollar.
The three major U.S. stock indexes and the main European
share index all declined more than 1 percent. B&B shares fell
24 percent after the lender said it replaced its chief
executive and slashed the price of emergency fund-raising to
secure a lifeline from private equity firm TPG Capital.
TPG Capital agreed to take a 23 percent stake in B&B, which
said it expects the British mortgage market to deteriorate.
"It's been maybe a bit of a wake-up call that the financial
problems are not just all down to the U.S. subprime market and
we can't insulate ourselves from that. It's been a bit of a
slap around the face for investors," said IG Index chief
markets strategist David Jones.
In early afternoon Standard & Poor's cut the ratings of
Lehman Brothers Inc <LEH.N>, Merrill Lynch & Co Inc <MER.N> and
Morgan Stanley <MS.N> and said the outlook on the large U.S.
financial services sector are now mostly negative.
Lehman shares were hurt the most, falling 7.9 percent to
$33.90. Morgan Stanley stock was down 3.7 percent to $42.60 and
Merrill Lynch shares fell 4.9 percent to $41.78.
After 1 p.m., the Dow Jones industrial average <> was
down 180.67 points, or 1.43 percent, at 12,457.65. The S&P 500
Index <.SPX> was down 19.76 points, or 1.41 percent, at
1,380.62. The Nasdaq Composite Index <> was down 45.00
points, or 1.78 percent, at 2,477.66.
In Europe, the FTSEurofirst 300 index <> of top
European shares fell 1.1 percent to close at 1,319.13 points.
Wachovia Corp <WB.N> shares fell more than 4 percent after
the bank announced the departure of its chief executive over
what it termed "disappointments," including the purchase of a
big mortgage lender at the height of the U.S. housing boom.
Financial stocks were among the worst-performing sectors.
Blue-chip banks JP Morgan Chase <JPM.N> fell 1.7 percent to
$42.27 and Bank of America <BAC.N> was off 1.6 percent to
$33.45. Wachovia fell to $22.79.
Adding to the gloom was a report from the Institute of
Supply Management showing U.S. factory activity contracted in
May for the fourth consecutive month, while prices paid by
factories surged to their highest since April 2004.
"The negatives are that the economy is still in a
contraction mode, as we've seen in the ISM today. The financial
companies are still in trouble, as we saw with the removal of
the head of Wachovia," said Joseph Battipaglia, market
strategist at Stifel Nicolaus in Yardley, Pennsylvania.
"So the outlook for what kind of growth and profits we can
have is quite uncertain."
The yen, which tends to get bid in times of heightened risk
aversion as investors unwind trades financed by borrowing the
Japanese currency at low interest rates, rose against the
dollar.
The dollar fell against the yen <JPY=> 1.35 percent at
104.08, while the euro <EUR=> rose 0.15 percent at $1.5576.
Against a basket of major currencies, the U.S. Dollar Index
<.DXY> fell 0.12 percent at 72.786.
The sour outlook from B&B renewed credit jitters and helped
a bid for safe-haven bonds stage a tentative bounce back from a
steep drop last week.
"It's a deserved correction. We had oversold last week and
the news about Bradford and Bingley provided the excuse," said
David Keeble, a bond strategist at Calyon in London.
The benchmark 10-year U.S. Treasury note <US10YT=RR> rose
27/32 to yield at 3.96 percent. The 30-year U.S. Treasury bond
<US30YT=RR> rose 26/32 to yield at 4.67 percent.
A recovery in crude was led by gas, heating oil and
gasoline, traders said.
U.S. light sweet crude oil <CLc1> rose $1.51 to $128.86.
U.S. gold futures climbed as buying in bullion increased as
oil pared initial losses, boosting gold's appeal as a hedge
against inflation.
Spot gold prices <XAU=> rose $10.05 to $895.95.
Japan's Nikkei share average <> rose 0.7 percent for
to its highest close since Jan. 9.
Technology stocks boosted Taiwan's TAIEX index <> 1.2
percent, while China Mobile <0941.HK> and CNOOC <0883.HK>,
China's No. 3 oil producer, led Hong Kong's Hang Seng index
<> up 1.3 percent, one of the region's largest gainers.
The MSCI index of shares in the Asia-Pacific region outside
Japan <.MIAPJ0000PUS> added 0.4 percet.
(Reporting by Richard Leong, Gertrude Chavez-Dreyfuss and
Frank Tang in New York and Amanda Cooper, Santosh Menon and Ian
Chua in London)
(Reporting by Herbert Lash. Editing by Richard Satran)
