(Updates with U.S. markets, changes byline, dateline, previous
LONDON)
NEW YORK, Jan 17 (Reuters) - U.S. stocks fell and Treasury
bonds climbed on Thursday as news of a sharp slowdown in
factory activity stoked fears of a U.S. recession and Federal
Reserve Chairman Ben Bernanke boosted expectations of an
aggressive interest rate cut in his testimony to Congress.
Merrill Lynch & Co Inc <MER.N>, the world's largest
brokerage, also put pressure on U.S. stocks after announcing a
nearly $10 billion quarterly loss after writedowns and
adjustments of about $16 billion. Investors have been acutely
worried about the continuing impact of the subprime crisis on
the financial sector and the availability of credit.
The Philadelphia Federal Reserve Bank survey, which showed
that factory activity in the U.S. mid-Atlantic region
contracted dramatically in January, also pushed European shares
into negative territory after a rollercoaster session.
"Philly Fed was lower-than-expected. It kind of shocked the
market," said Cleveland Rueckert at Birinyi Associates Inc. in
Stamford, Connecticut,
In testimony before the U.S. House of Representatives'
Budget Committee, Fed chief Bernanke repeated his recent
downbeat economic views, giving another signal that he will
likely push through a hefty half-percentage point rate cut at
the central bank policy committee meet at month's end.
The U.S. dollar, which has been hitting new lows this week,
suffered after Bernanke's comments, down 0.52 percent at 106.9
against the Japanese yen.
Lower U.S. interest rates are a negative for the U.S.
greenback since they make dollar-denominated investments less
attractive to foreign investors.
The Dow Jones industrial average <> was down 164.04
points, or 1.32 percent, at 12,302.12 at midday. The Standard &
Poor's 500 Index <.SPX> was down 24.79 points, or 1.81 percent,
at 1,348.41. The Nasdaq Composite Index <> was down 29.99
points, or 1.25 percent, at 2,364.60.
Concerns about the U.S. economy slipping into recession
also pushed oil prices a dollar lower to less than $90 a
barrel.
TREASURY BONDS BENEFIT
The Philadelphia Federal Reserve Bank's data on factory
activity boosted prices of U.S. Treasuries, which tend to rise
on signs of a softening economy.
The reading "is a fresh reminder that the manufacturing
sector continues to struggle -- we are seeing a bid come back
into the Treasury market," said Wan Chong Kung, senior
fixed-income portfolio manager at First American Funds in
Minneapolis.
Benchmark 10-year notes rose 20/32 in price to yield 3.6655
percent. Two-year notes climbed 3/32 to yield 2.4572 percent.
GLOBAL FEARS
Economic worries have battered global stocks so far this
year, sending MSCI's main world stock index down 7 percent. The
index was down 0.85 percent at 369.65 on Thursday.
After trading in the black, the pan-European FTSEurofirst
300 index <> ended down 0.6 percent.
By contrast, Japan's benchmark Nikkei average rose 2.1
percent, gaining for the first time in five sessions. It ended
the session up 2.1 percent at 13,783.45, and the broader TOPIX
index <> was up 2.2 percent at 1,330.44.
(Additional reporting by Jeremy Gaunt and Randy Fabi in London
and Caroline Valetkevitch, Nick Olivari, Gertrude
Chavez-Dreyfus and Chris Reese in New York)
(Reporting by Neil Shah. Editing by Richard Satran)
