* Global stocks turn lower on fears over U.S. bank plans
* Bonds erase majority of losses as stocks turn lower
* Oil falls below $40 a barrel as equity markets fall
* Dollar strengthens in safe have bid, yen declines
(Recasts with U.S. markets, changes dateline; previous
LONDON)
By Herbert Lash
NEW YORK, Feb 23 (Reuters) - Global stocks turned sharply
lower on Monday, with the Dow falling to lows last seen in
1997, on growing doubts about U.S. government's plans to shore
up beleaguered banks, driving up the bid for assets viewed as
relatively safe.
The Dow plunged in midday trade, as markets reversed course
after an initial warm reception to rising expectations that the
U.S. government will increase its stake in Citigroup <C.N>,
instead of fully nationalizing it.
World stocks had climbed and government bonds traded lower
before U.S. markets opened.
U.S. banking regulators pledged to provide more capital to
banks as needed and keep large institutions viable through a
program to "stress test" banks, to be launched on Wednesday,
called the Capital Assistance Program. []
But the initial euphoria soon waned as after reflection,
some saw an increased government stake in Citigroup as a step
toward nationalization.
"The market initially saw it as 'glass half full' but the
other way of looking at it is Citi taking one huge step toward
public ownership," said Richard McGuire, head of rates strategy
at RBC Capital Markets in London. That "is really the doomsday
scenario for anyone holding Citigroup shares," he said.
U.S. stocks fell more than 2 percent, and the benchmark S&P
500 broke through a bear market closing low of 752.44 set on
Nov. 20. The index still traded higher than intraday lows set
then. The Dow slid to lows last seen in 1997.
While Citigroup was up more than 8 percent, after paring
double-digit gains, advancing volume on the New York Stock
Exchange outpaced declining volume by more than 4 to 1.
"There's just uncertainty about what stance the government
will take, whether there's nationalization or not, or some form
of it that we're in currently," said Peter Boockvar, equity
strategist at Miller Tabak & Co.
"But it doesn't matter, the economy remains weak, the
market is worried about earnings," Boockvar said.
After 1 p.m., the Dow Jones industrial average <> was
down 155.71 points, or 2.11 percent, at 7,209.96. The Standard
& Poor's 500 Index <.SPX> was down 18.44 points, or 2.39
percent, at 751.61. The Nasdaq Composite Index <> was down
37.28 points, or 2.59 percent, at 1,403.95.
European shares closed at nearly six-year lows as regional
banks fell. The FTSEurofirst 300 <> index of top European
shares closed off 0.9 percent at 729.39 points, and is now down
12 percent this year after plunging 45 percent in 2008.
Several banks fell sharply, with UBS <UBSN.VX> down 9
percent and Deutsche Bank <DBKGn.DE> off more than 5 percent.
"It's very difficult to make an investment case for banks
because of the uncertainty over how much capital dilution they
will suffer in order to be kept in business," said Andrew Bell,
head of research at Rensburg Sheppards.
In euro zone government debt markets, bunds recovered
earlier losses to close only slightly down as fears over the
U.S. banking sector hit European equities,
U.S. Treasuries turned higher, even as investors awaited
the sale of $94 billion of new supply this week, which had
depressed prices earlier in the session.
The benchmark 10-year U.S. Treasury note <US10YT=RR> was up
1/32 in price to yield 2.79 percent. The 2-year U.S. Treasury
note <US2YT=RR> was unchanged in price, yielding 0.97 percent.
The euro surrendered gains against the dollar after
European Central Bank president Jean-Claude Trichet said the
euro-zone financial system is under severe strain.
The dollar rose against a basket of major trading-partner
currencies, with the U.S. Dollar Index <.DXY> up 0.58 percent
at 87.092.
The euro <EUR=> fell 0.79 percent to $1.2739. Against the
yen, the dollar <JPY=> was up 1.64 percent at 94.66.
Oil slipped below $40 a barrel as the U.S. stock market
retreated despite a report that the U.S. government was in
talks on increasing its stake in Citigroup. []
U.S. light sweet crude oil <CLc1> fell 99 cents, or 2.47
percent, to $39.04 a barrel.
But investors worry that losses from credit cards, emerging
markets, trading and toxic assets at Citigroup could overwhelm
Chief Executive Vikram Pandit's efforts to restore its fiscal
footing. Analysts do not expect Citigroup to be profitable in
2009 or 2010.
(Reporting by Ellis Mnyandu, Ellen Freilich and Nick Olivari
in New York; and Christopher Johnson, Barbara Lewis and Atul
Prakash in London; writing by Herbert Lash, Editing by Chizu
Nomiyama)
