(Updates with U.S. late-day action)
By Neil Shah
NEW YORK, Jan 17 (Reuters) - U.S. stocks slid for a third
straight day on Thursday and Treasury bonds climbed as a plunge
in regional factory activity fanned 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.
The Standard & Poor's 500 Index fell almost 2 percent,
while the Dow industrial average, which added a drop of nearly
2 percent that extended its decline since the start of this
year to about 1,000 points.
Wall Street kicked off in the loss column after Merrill
Lynch & Co Inc <MER.N>, the world's largest brokerage,
announced a nearly $10 billion quarterly loss, with writedowns
of over $16 billion. Investors have been acutely worried about
the continuing impact of the subprime crisis on the financial
sector and the availability of credit.
Showing the downturn spreading to the manufacturing sector,
a Philadelphia Federal Reserve Bank survey said factory
activity in the U.S. mid-Atlantic region contracted
dramatically in early January. That report 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 106.90
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.
Investors were also hit with more bad news on housing as a
government report showed that groundbreaking on new homes last
month slumped to the slowest pace since 1991, while building
permits sank to their lowest since 1993.
The Dow Jones industrial average <> was down 196.40
points, or 1.58 percent, at 12,269.76. The Standard & Poor's
500 Index <.SPX> was down 25.54 points, or 1.86 percent, at
1,347.66. The Nasdaq Composite Index <> was down 27.55
points, or 1.15 percent, at 2,367.04.
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.
In the afternoon, the two-year Treasury note's yield dipped
below 2.4268 percent to the lowest level since September 2004.
"When the head of a central bank says there may be a need
for additional action, the writing is already on the wall,"
said David Watt, senior currency strategist at RBC Capital
Markets in Toronto.
Benchmark 10-year notes rose 27/32 in price to yield 3.6377
percent. Two-year notes climbed 4/32 to yield 2.4368 percent.
GLOBAL FEARS
Fears that a U.S. recession may lie ahead has roiled global
stock markets in recent weeks.
U.S. blue-chip shares are down about 7.3 percent since the
start of the year, while the MSCI's main world stock index is
down 7 percent. The index was down 0.89 percent at 369.49
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, Kristina Cooke, Nick Olivari,
Gertrude Chavez-Dreyfus and Chris Reese in New York)
(Reporting by Neil Shah. Editing by Richard Satran)
