(Updates with U.S. markets, changes dateline to New York,
byline)
By Burton Frierson
NEW YORK, Jan 25 (Reuters) - Wall Street's recovery rally
faltered on Friday as stocks pulled back from early gains on
renewed fears that Washington's fiscal stimulus package for the
U.S. economy will not be a panacea for the credit-stressed
global financial system.
Other markets buoyed on Thursday by revived economic
optimism, including the dollar and commodities, also cut early
gains.
Shares retreated from a buoyant early start in New York,
damping Europe's earlier gains, as the warm glow the U.S.
economic package that emerged on Thursday and a strong earnings
report early in the day from Microsoft Corp <MSFT.O> gave way
to uncertainty.
In volatile global equity markets, investors once again
began fretting over fears of more surprises lurking in the
troubled financial sector, amid efforts by U.S. officials this
week to bolster the weakened bond insurance business.
Investors have worried that the declining fortunes of bond
insurers could cause deeper financial losses on top of last
year's mortgage debacle and deal a further blow to beaten down
stocks and the beleaguered U.S. economy.
This week, rattled investors have had to contend with
recession fears that have pummeled world stocks, though many
took comfort from the fact that some of the worst falls were
the anomalous result of a rogue trader in France, not the sign
of systemic meltdown.
This topsy-turvy ride, which included a sharp two-day rally
on Wednesday and Thursday, left nerves frayed, inspiring a
round of nervous profit-taking in equities.
"The extreme optimism of the past two days was a bit
misplaced," said Michael James, senior trader at regional
investment bank Wedbush Morgan in Los Angeles. "The economic
backdrop hasn't changed and there is still a high level of
nervousness about any headlines that reinforce there is still
reason to be concerned about the market's direction."
By New York midsession, benchmark indexes were were mixed.
The Dow Jones industrial average <> was down 90 points or
0.7 percent at 12,290, after rising as much as 12,486. The
Standard & Poor's 500 Index <.SPX> fell 11 points, or 0.88
percent. The Nasdaq Composite Index dropped <> 12.5 points
or about one-half percent.
BONDS BENEFIT FROM TURMOIL
The wild ride in stocks left some investors seeking a
safe-haven in government bonds, pushing U.S. Treasury debt
prices higher and, therefore, yields lower.
The benchmark 10-year U.S. Treasury note <US10YT=RR> rose
12/32, to yield 3.666 percent. The 2-year U.S. Treasury note
<US2YT=RR> was up 3/32, yielding 2.2559 percent.
In currencies, the dollar rose broadly initially as
investors scaled back bets for another aggressive Federal
Reserve interest-rate cut next week and on optimism that the
$150 billion stimulus package would help support the U.S.
economy.
The greenback was up against a basket of major
trading-partner currencies, with the U.S. Dollar Index <.DXY>
up 0.43 percent at 76.017 from a previous session close of
75.692. The euro <EUR=> fell 0.66 percent to $1.4669 from a
previous session close of $1.4766. Against Japan's yen <JPY=>,
the dollar was up 0.36 percent at 107.27 yen, compared with
Thursday's close at 106.89.
In energy and commodities, U.S. crude oil futures <CLc1>
rose $1.52, or 1.7 percent, to $90.93 per barrel. Gold prices
<XAU=> rose $3.90, or 0.43 percent, to $910.90.
EUROPE AND JAPAN
European stocks ended lower, weighed down by a steep fall
in shares of Belgian-Dutch financial group Fortis <FOR.AS>
while tech stocks such as telecoms equipment maker Ericsson
<ERICb.ST> rose.
The benchmark FTSEurofirst 300 index <> closed 0.05
percent lower at 1,329.77 points, having risen as much as 2.1
percent earlier in the session.
In Tokyo, the benchmark Nikkei <> closed up 4.1
percent and the broader TOPIX <> finished up 4.7 percent,
both marking their biggest one-day gains since March 4, 2002 --
when both surged on a government crackdown on short sellers.
(Reporting by Burton Frierson; Editing by Richard Satran)
