* U.S. stocks slide as economic data curbs optimism
* S&P lower outlook for UK stirs fears about U.S. debt
* German bunds shine as gilts wilt after S&P action
* Dollar slumps, sterling falls, then rises on S&P
* Oil falls below $61 after rise to 6-month peak
(Updates with U.S. markets activity; changes dateline,
previous LONDON)
By Herbert Lash
NEW YORK, May 21 (Reuters) - Global stocks slid, the dollar
fell and U.S. government debt plunged on Thursday as fresh
signs of economic weakness and a potential credit rating cut
for Britain dashed budding hopes for a quick recovery.
U.S. Treasuries debt fell sharply after the government said
it would sell $101 billion of new notes next week, adding to
worries whether global investors can digest all the pending
supply.
Bond investors were also left mulling the value of U.S.
debt after Standard & Poor's cut its credit outlook on the
United Kingdom to negative from stable.
The weakness in government debt came despite a host of
events that normally would be bullish for bonds, including
falling stocks, the Federal Reserve buying Treasuries and data
hinting the U.S. recession may be far from over.
At the same time analysts said an acceleration the dollar's
slide this week may mark a pivotal moment in the financial
crisis. A breakdown in the high correlation between the dollar
and stocks hints at the return of stress-free investment
patterns.
S&P's decision to cut its UK credit outlook to negative
from stable threatened Britain's top AAA rating, and led some
investors fear that huge deficits may leave the United States
in the same situation.
"People are asking, if the UK is having problems like this
then maybe U.S. sovereign debt is also not as solid," said
David Dietze, chief investment strategist at Point View
Financial Services in Summit, New Jersey, who noted, "there is
going to be a huge amount of supply to feed the deficit."
Bill Gross, the co-chief investment officer of leading
bond fund Pacific Investment Management Co., said market fears
that the United States is at risk of losing its AAA credit
rating was putting the U.S. dollar, stocks and bonds under
severe selling pressure.
Investors fear that that United States is "going the way of
the UK -- losing AAA rating which affects all financial assets
and the dollar," Gross told Reuters via email.
The euro rose to a session peak of $1.3901, while the pound
hit a session high at $1.5883 <GBP=> after earlier tumbling on
S&P's potential downgrade of Britain's AAA credit rating.
S&P's action further weighed on investor sentiment after a
disappointing regional Federal Reserve survey fueled doubts
about the prospects for recovery. For details, see
[]
The Philadelphia Federal Reserve Bank said its business
activity index improved to minus 22.6 in May versus minus 24.4
in April -- but still weaker than economists' expectations of
minus 18.0.
"The issue is, yes, we're moving higher, but we're still
far short of what would classify as growth," said Dan
Greenhaus, analyst at Miller Tabak & Co in New York.
Peter Kenny, managing director at Knight Equity Markets in
Jersey City, New Jersey, said the data did not "justify the
move we've seen in the Dow over the last two-and-a-half
months."
"What it really is telling us is that we're in for a very
slow and deliberate turn before we can really start building a
solid foundation for the next move up in the market," he said.
Shares of big manufacturers dropped, and investors also
pummeled technology shares.
At 1:30 p.m., the Dow Jones industrial average <> was
down 155.63 points, or 1.85 percent, at 8,266.41. The Standard
& Poor's 500 Index <.SPX> was down 17.72 points, or 1.96
percent, at 885.75. The Nasdaq Composite Index <> was down
38.62 points, or 2.24 percent, at 1,689.22.
European shares fell, weighed by banks and commodities, as
S&P's potential UK credit cut added to worries sparked by news
on Wednesday that Federal Reserve policy-makers had cut their
U.S. growth forecasts over the next three years.
The pan-European FTSEurofirst 300 <> index of top
shares fell 2.1 percent to 857.52 points, breaking five
successive sessions of gains.
"This is just a general pull-back by investors," said Peter
Dixon, strategist at Commerzbank. "This is a sharp fall, but
really it is a pause in what has been a remarkably strong
rally."
Benchmark euro zone government bond rallied, outperforming
UK gilts as well as higher yielding regional peers, after S&P's
credit rating outlook for Britain.
The move sparked fears that S&P may take another look at
ratings within the euro zone, said Calyon strategist Peter
Chatwell, driving investors to the relatively safety of
benchmark German Bunds.
"It looks as if the assumption is: Germany's safe ... the
other issuers in the euro zone are maybe in doubt," Chatwell
said.
Benchmark 10-year Treasury notes <US10YT=RR> were trading
33/32 lower in price to yield 3.31 percent, marking the highest
yield in nearly two weeks. The 30-year bond <US30YT=RR> was
trading 2-2/32 lower to yield 4.27 percent.
The dollar fell against a basket of major currencies, with
the U.S. Dollar Index <.DXY> down 0.64 percent at 80.673.
Against the yen, the dollar <JPY=> fell 0.37 percent at 94.50.
Oil fell below $61 a barrel, a day after hitting a
six-month peak over $62. U.S. light sweet crude oil <CLc1> fell
$1.16 to $60.88 a barrel.
Spot gold prices <XAU=> rose $12.20 to $949.30 an ounce.
Asian stocks slipped overnight on the Fed's lowered growth
forecasts. Japan's Nikkei average <> fell 0.9 percent as
the yen strengthened and MSCI's index of Asian shares outside
Japan <.MIAPJ0000PUS> eased 0.5 percent.
(Reporting by Chuck Mikolajczak, Wanfeng Zhou and Chris Reese
in New York; Joanne Frearson, Ian Chua, Catherine Bosley, Jane
Merriman and Jan Harvey in London; writing by Herbert Lash;
Editing by Leslie Adler)
