(Updates with stocks close)
By Richard Satran
NEW YORK, Jan 30 (Reuters) - Financial markets rallied on
Wednesday in a brief celebration over a U.S. Federal Reserve
interest rate cut that sent the Dow industrials 200 points
higher before revived credit crunch fears erased the gains.
Bonds and the dollar moved lower as well.
Stocks leaped after the Fed's aggressive
half-percentage-point rate cut to stimulate the sagging U.S.
economy -- but quickly backed off as a jittery market reacted
to speculation on financial television network CNBC that bond
rating groups might cut bank insurers' ratings.
While no such announcement had been made, traders quickly
booked profits since previous disclosures surrounding the
insurers have hit markets hard. Bond insurers play a critical
role in determining whether investors will purchase securities.
"My gut is telling me Moody's and S&P are going to downgrade
either one or both," said the CNBC commentator.
The Dow Jones industrial average <> closed down 37.47
points, or 0.30 percent, at 12,442.83. The Standard & Poor's
500 Index <.SPX> was down 6.49 points, or 0.48 percent, at
1,355.81. The Nasdaq Composite Index <> was down 9.06
points, or 0.38 percent, at 2,349.00. Earlier, the Dow had
jumped as high as 12,680.
The volatile trading followed the Fed's move, also aimed at
stabilizing markets. Prior to the central bank's policy
meeting, traders were evenly split over whether the Fed would
cut rates by half a point or a quarter point.
Rate cut hopes rose early on Wednesday, 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. The sluggish growth virtually assured a
more aggressive move by the Fed, traders said.
"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 at online foreign exchange compnay HiFX.
Inflation worries boosted gold to an all-time high above
$940 an ounce and pushed bond prices lower. The benchmark
10-year U.S. Treasury note <US10YT=RR> was down 5/32, with the
yield at 3.6992 percent. Bond yields rise as prices fall.
"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 75 basis-point rate cut in an emergency action last
week. The Fed has stepped up its operations to calm markets
worried that investors pulling back from securities markets are
causing a credit crunch, economists say.
Such fears were revived earlier in the day as European
stocks opened lower when UBS AG <UBSN.VX> unveiled $4 billion
in new write-downs. 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. Banks will use the opportunity to
clear their books of bad loans, he said.
Investors betting that the bottom has already been reached
in a U.S. recession drew support early in the session from a
report from data provider ADP that 130,000 new U.S.
private-sector jobs were created in January, three times the
consensus forecast.
The Fed's rate cut revived the view that U.S. inflation
could come back, especially with the dollar weaker and the
economy stronger from rate cuts.
Gold on the New York futures market <GCJ8> rose $9.40, or 1
percent, to a record $940.20 before settling back to $934.
"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.
The euro <EUR=> was up 0.69 percent at $1.4877 from a
previous session close of $1.4775. Against the Japanese yen,
the dollar <JPY=> was down 0.48 percent.
(Reporting by Gertrude Chavez-Dreyfuss, Ellis Mnyandu and
Pedro Nicolaci da Costa; Writing by Richard Satran; Editing by
Jonathan Oatis)
