(Updates with U.S. data)
By Jeremy Gaunt, European Investment Correspondent
LONDON, Jan 15 (Reuters) - Massive losses at Citigroup <C.N>
and a surprise fall in U.S. retail sales, fuelling worries about
the state of the global economy, knocked equities back on
Tuesday and hit the dollar.
Wall Street looked set for a poor start and European stocks
were in the red after Citi, the largest U.S. bank, reported
earnings-per-share losses that were nearly twice what was
expected and cut its dividend.
But it also said it had fewer write-downs from the credit
crisis than markets had expected, although they amounted to a
colossal $18.1 billion.
Financial services company State Street Corp <STT.N>
reported lower fourth quarter net income after it set aside
millions for legal costs tied to mortgage securities losses
while U.S. Bancorp <USB.N>, the sixth-largest U.S. bank,
suffered a 21 percent fall in fourth-quarter profit.
Investors have focused on banks to see how hard the credit
crunch has hit them and gauge the overall state of the industry.
Wall Street did get a boost on Monday when IBM <IBM.N> came
out with better-than-expected results, suggesting that the gloom
about financials may not necessarily have spread.
Investors on Tuesday, however, were rattled by the global
economic outlook.
Sales at U.S. retailers fell 0.4 percent in December and
were less vigorous in November than previously thought,
according to a government report that implied costlier energy
and slumping housing prices were taking a toll on consumers.
The FTSEurofirst 300 <> index of top European shares
was down 1.3 percent, weakened among other things by Britain's
largest retailer Tesco <TSCO.L>, which missed sales forecasts.
Germany's ZEW also reported that German investor sentiment
declined more than expected.
"The outlook for markets is all linked to whether we are in
a mid-cycle slowdown or global recession and the problem is that
the two of them look very, very similar at the start, but have
different market consequences," said Andrew Lynch, European fund
manager at Schroders.
Earlier, Japan's Nikkei <> ended below 14,000 for the
first time in 26 months. It closed down 1 percent at 13,972.63
and the broader TOPIX index <> lost 2 percent to 1,350.20.
GOLD, DOLLAR, BONDS
The dollar matched Monday's seven-week lows against the yen
on expectations that U.S. economic data and banking results
could boost the case for aggressive, growth-boosting interest
rate cuts by the Federal Reserve.
Futures markets are now reflecting a roughly 50-50 chance of
the Fed slashing interest rates by three-quarters of a
percentage point to 3.50 percent by the end of the month.
The dollar fell 1.25 percent to 106.87, a 2-1/2 year low.
The euro rose a quarter of a percent to $1.4904, not far below
November's record high of $1.4966 <EUR=>.
Spot gold <XAU=> fell back from Monday's all-time high of
$914 an ounce. It was trading around $908, held high by economic
worries and the weak dollar.
Euro zone government bond prices rose on demand. The
interest rate-sensitive two-year Schatz yield <EU2YT=RR> was at
3.668 percent and the 10-year Bund yield <EU10YT=RR> was at
4.029 percent.
(Editing by Mike Peacock)
