(Recasts lead, updates with late U.S. prices, adds quote on
consumer)
By Jennifer Ablan
NEW YORK, Feb 15 (Reuters) - World stock markets dropped on
Friday and the dollar posted its worst weekly performance
against the euro this year as worries deepened over the extent
of the global economic slowdown after weak readings on the U.S.
consumer and manufacturing fronts and further credit losses at
banks.
The two-year Treasury note soared in price, with its yield
briefly dipping to around 1.83 percent, the lowest level since
May 2004, before settling at around 1.90 as investors shunned
stocks and other riskier assets and sought shelter in
relatively safe U.S. Treasuries.
Fears of a U.S. recession intensified on Friday after a
widely followed gauge of U.S. consumer sentiment plunged to a
16-year low in February, to a level that has characterized past
recessions, and as manufacturing in New York contracted this
month for the first time in almost three years.
"Incoming economic data and news from Corporate America
sustain indications and sentiment that we are definitely in a
credit and housing recession," said James Kochan, fixed-income
strategist at Wells Fargo Funds Management, in Menomonee Falls,
Wisconsin.
"Stocks are feeling the heat from the seizing up and
depressed activity in the credit market. The breadth of the
difficulties in credit -- its size and scope -- dwarfs that of
the Long-Term Capital Management crisis," he said, referring to
the 1998 hedge fund collapse.
The Dow Jones industrial average .DJI> was down 28.61
points, or 0.23 percent, at 12,348.37. The Standard & Poor's
500 Index .SPX> was up 1.12 points, or 0.08 percent, at
1,349.98. The Nasdaq Composite Index .IXIC> was down 10.74
points, or 0.46 percent, at 2,321.80.
Adding to anxiety on the consumer front, Best Buy Co., the
largest U.S. consumer electronics chain, warned of a sudden
drop-off in consumer traffic right after the holidays and cut
its full-year earnings forecast, driving its shares down 2.5
percent to $44.62.
"The (recession) is going to be a long one," said Michael
Metz, chief investment strategist at Oppenheimer in New York.
"I think we'll have problems getting out of this because the
consumer is not going to lead the way, not for a year and a
half or two."
Consumer spending, a key driver of U.S. economic growth,
faces headwinds from the decline in home prices and workers'
fears about layoffs, economists say.
Consumer sentiment, measured by the Reuters/University of
Michigan index, fell to 69.6 in early February from a reading
of 78.4 in January, its lowest reading since February 1992.
The New York Federal Reserve's "Empire State" index
tracking general business conditions tumbled nearly 21 points
to a negative 11.7 reading, falling below the zero for the
first time since May 2005.
Investors have been just as nervous about credit
conditions.
Citigroup Inc. has barred investors in one of its hedge
funds from withdrawing their money, and a new leveraged fund
lost 52 percent in its first three months, The Wall Street
Journal reported. Citi shares dropped 2 percent, to $25.24.
In Europe, shares ended sharply lower on Friday as
investors worried increasingly about the U.S. economy and the
prospects of more write-downs at top banks due to the credit
crisis.
The FTSEurofirst 300 index .FTEU3> ended down 1.96 percent
at 1,309.34, with French bank Natixis the top loser, tumbling
11 percent after it unveiled more than 1 billion euros in
write-downs. UBS fell 3.8 percent, taking its losses for the
week to around 12 percent as Citigroup said in a note it
expected more write-downs at the Swiss bank.
In Japan, the Nikkei 225 Index .N225> dropped 0.03 percent
to end at 13,622.56. It was only in December that the Nikkei
was trading over 15,250.00.
MORE ANXIETY BOOSTS BONDS
In the U.S. government bond market, some parts of the yield
curve benefited from the flight from risk-taking. The benchmark
10-year U.S. Treasury note US10YT=RR was up 14/32, with the
yield at 3.7647 percent.
The 2-year U.S. Treasury note US2YT=RR was unchanged with
the yield at 1.899 percent, but not before dipping briefly to
around 1.83 percent.
On the longer end of the Treasury curve, the 30-year U.S.
Treasury bond US30YT=RR was up 37/32, with the yield at 4.58
percent.
In currencies, the dollar was down against a basket of
major trading-partner currencies, with the U.S. Dollar Index
.DXY> down 0.14 percent at 76.049 from a previous session close
of 76.155.
The euro EUR=> had a good day again against the greenback,
up 0.31 percent at $1.4682 from a previous session close of
$1.4637.
Michael Woolfolk, senior FX strategist at The Bank of New
York Mellon, said the poor U.S. economic outlook sets the euro
up for a run at its record high just shy of $1.50.
Against the Japanese yen, the dollar JPY=> was down 0.21
percent at 107.70 from a previous session close of 107.93.
In energy and commodities prices, U.S. light sweet crude oil
CLc1> rose 11 cents, or 0.12 percent, to $95.57 per barrel,
and spot gold prices XAU=> fell $5.00, or 0.55 percent, to
$902.80. The Reuters/Jefferies CRB Index .CRB> was down 0.17
points, or 0.04 percent, at 384.22.
(Additional reporting by John Parry, Kristina Cooke, Steven C.
Johnson and Caroline Valetkevitch in New York and Natsuko Waki
in London; Editing by Leslie Adler)
