By Daniel Bases
NEW YORK, Feb 5 (Reuters) - Stock prices fell across the
globe on Tuesday, driven by a sharp retrenchment in the U.S.
services sector last month that raised fears of a recession in
the world's largest economy.
Concerns the U.S. credit crisis is spreading beyond
mortgages to consumer credit compounded fears of weaker global
growth. Bank stocks and financial services companies were hit
particularly hard, as well as telecommunications and energy
companies.
Benchmark U.S. stock indexes skidded. The Dow Jones
industrial average <> was down 245.33 points, or 1.94
percent, at 12,389.83. The Standard & Poor's 500 Index <.SPX>
fell 27.93 points, or 2.02 percent, at 1,352.89. The Nasdaq
Composite Index <> lost 40.78 points, or 1.71 percent, at
2,342.07.
"The decline today reflects a market that's completely
driven by fear," said Scott Wren, senior equity strategist at
A.G. Edwards & Sons Inc.
Earlier in the global trading day, European service sector
surveys also reflected weakness, driving stocks down and bonds
higher.
The steep drop in the U.S. Institute for Supply
Management's index of non-manufacturing industry to levels not
seen since the 2001 recession boosted U.S. and European
government debt prices.
"It's another recession marker on the radar screen," said
Cary Leahy, economist at Decision Economics in New York.
The dour outlook on the U.S. economy comes despite interest
rate cuts totaling 2.25 percentage points in the Federal
Reserve's benchmark fed funds rate since September to spur
economic growth.
Following the ISM report, short-term interest rate futures
fully priced in another 50 basis point rate cut at the Fed's
next meeting on March 18. The current rate is 3.0 percent.
VOLATILE MARKETS
The market volatility came on the biggest day in U.S.
presidential nominating contests, known as Super Tuesday.
Twenty-four of the 50 states were holding nominating
contests for the Democratic and/or Republic parties, and at the
end of the day there could be clear winners for the final run
to the November presidential election.
In addition, markets and rising recession fears will top
the agenda at the Group of Seven finance ministers and central
banker governors meeting in Tokyo on Saturday.
In Europe, surveys of purchasing managers showed Germany's
service sector contracted for the first time in 4-1/2 years in
January. Service sectors in Spain and Italy also shrank and
overall euro zone services growth decelerated to a virtual
standstill.
The European Central Bank is not expected to lower interest
rates at its policy meeting on Thursday. However, speculation
it may be forced to cut sooner than currently forecast sent the
euro EUR=> down more than 1.27 percent against the U.S. dollar.
It was trading at $1.4636.
The sharp rise in the dollar against the euro triggered
selling in the spot gold XAU=> market. Gold fell at one point
more than 2 percent to a two-week low of $885.30 an ounce but
then recovered ground to trade down $9.60, or 1.06 percent, at
$894.80. Gold surged to a record high of $936.60 on Friday.
HARD HIT
U.S. financial institutions, including American Express Co,
Wachovia Corp and Wells Fargo & Co, were downgraded on Monday
as analysts pointed to U.S. consumers falling behind on loan
payments. That sent share prices lower on Monday and carried
over into Tuesday's trade
U.S. Treasury debt prices were higher. The benchmark
10-year U.S. Treasury note US10YT=RR gained 24/32, with the
yield at 3.5554 percent. Price moves inversely to yields.
"The ISM non-manufacturing index tells us that the
recession has indeed arrived. For the Fed, it justifies their
aggressive action and I think that low yields in the market are
probably justified," said Jane Caron, chief economic strategist
at Dwight Asset Management, in Burlington, Vermont.
The euro zone benchmark 10-year government bond was higher,
driving its yield down to 3.84 percent EU10YT=RR.
In Europe, the FTSEurofirst 300 stock index .FTEU3> closed
down 3.09 percent, outstripping a 2.47 percent loss on MSCI's
world equity index .MIWD00000PUS.
Japan's Nikkei stock index .N225> closed down 0.8 percent,
with Honda Motor Co Ltd under pressure due to the U.S.
recession fears.
Crude oil prices fell $1.68 to $88.34 a barrel, a loss of
1.87 percent CLc1>. Prices for corn, soybeans and wheat all
rose. However, the recession fears pushed copper prices lower.
(Additional reporting by Mike Dolan in London, Pedro Dacosta,
Burton Frierson, and Ellis Mnyandu in New York; Editing by Dan
Grebler)
