(Updates market action)
By Richard Satran
NEW YORK, Jan 30 (Reuters) - Wall Street stocks and gold
surged and Treasuries fell on Wednesday as worries over slow
economic growth eased and inflation fears mounted following the
second U.S. Federal Reserve interest rate cut in eight days.
The dollar fell sharply to two-week lows, and key
commodities bounced from early declines. Gold hit a record at
above $940.
The Fed cut its key rates by half a percentage point at the
end of its two-day policy meeting. Before the decision, traders
were evenly split over whether the central bank would cut rates
by half a point or a quarter point.
"This move is really designed to help financial markets,
even if it allows inflation pressures to pick up later on down
the line," said Amo Sahota, president and head trader of Global
Research,HiFX.
In trading an hour after the cut, the Dow Jones industrial
average <> was up 185 points, or 1.5 percent, at 12,666.
The Standard & Poor's 500 Index <.SPX> was up 22 points, or
1.64 percent, at 1,386. The Nasdaq Composite Index <> was
up 35 points, or 1.5 percent, at 2,393.
Treasury bond investors were more worried about the chance
for inflation down the road than equities traders, whose
recession fears have restrained stocks this year. Benchmark
10-year notes <US10YT=RR> were last down 13/32 on the day,
which pushed yields up to 3.73 percent.
"The Treasury market's reaction tells you the long end of
the market, contrary to what the Fed says, is really worried
about inflation," said John Derrick, director of research and
fixed-income securities manager at U.S. Global Investors Inc of
San Antonio, Texas. "This is very aggressive action of 125
basis points of cuts in about a week."
The Fed set up expectations of an aggressive move after it
made a 3/4-point rate cut in an emergency action last week.
Skepticism grew over another sharp cut on scattered signs of
U.S. economic recovery and concern that the Fed's emergency
measure may have been a flawed response to short-term market
declines sparked by a rogue trader at French bank Societe
Generale <SOGN,PA.>.
Rate cut hopes rose again early on Wednesday, though, on a
report that U.S. economic growth last year dropped to a
five-year low of 2.2 percent, with a fourth-quarter gain of
just 0.6 percent, half the expected rate.
Earlier, European stocks and the dollar were hit as UBS
<UBSN.VX> unveiled $4 billion in new write-downs, stirring
fears of a deepening credit crisis. UBS was among the
hardest-hit of the banks around the world that have
collectively suffered more than $100 billion in losses from the
crisis originating from defaults in U.S. subprime mortgages.
The big Swiss bank's charges reminded investors that the
Fed action can do nothing to help results in the earnings
season starting on Wall Street.
"The fourth-quarter reporting season will be a real acid
test for the banks," said Franz Wenzel, strategist at AXA
Investment Managers in Paris. "Most of the banks will try to
put all the write-downs in their 2007 results as they want to
clean the balance sheet going forward."
Some investors were betting that the bottom has already
been reached in a U.S. recession that probably began last year.
The view gained support early in the day as private data
provider ADP reported 130,000 new U.S. private-sector jobs were
created in January, three times the consensus forecast.
Investors were less concerned over the impact of higher
prices, which the Fed must worry about as it stimulates the
economy. Commodities drifted lower on the surprising decline in
fourth-quarter GDP growth.
"The Fed understands that it needs to make hay while the
sun shines by pumping as much liquidity into the economy now,
while it still can, before the public's inflation expectations
catch up with reality," said John Kosar, president of Asbury
Research in Chicago.
Gold on the New York futures market <GCJ8> was up $9.40, or
1 percent, at $940.20.
(Reporting by Gertrude Chavez-Dreyfuss, Ellis Mnyandu and
Pedro Nicolaci da Costa; Writing by Richard Satran; Editing by
Jonathan Oatis)
