(Recasts with U.S. markets, adds byline; dateline previous
LONDON)
By Herbert Lash
NEW YORK, March 14 (Reuters) - The emergency funding plan
for cash-strapped brokerage Bear Stearns <BSC.N> on Friday
slammed U.S. and European stocks and boosted bonds already
jittery over the impact of a widening credit crunch.
Shares of Bear Sterns lost nearly half their value and
dragged other financial stocks lower with it.Trading overall
was volatile as investors tried to absorb the stunning news of
the bailout.
The initial announcement that JPMorgan Chase would provide
financing to Bear Stearns lifted European shares and index
futures, on the view that a white knight had stepped up. But
traders then focused on additional statements that the firm's
cash position had deteriorated and the Federal Reserve Bank of
New York also was part of the funding caused a reassessment.
The bank has long been considered one of the institutions
hardest hit by a credit crisis that has hammered financial
markets for months, a suspicion that appeared validated by the
new developments.
The Dow industrials, after falling as much as 200 points,
traded 138 points lower at 12,000 in late morning dealings.
Unsettled equity investors piled into the relative safety
of U.S. Treasuries as equity markets turned sharply lower,
which moved to wide gains as interest rates dropped and some
speculated the Fed now may cut rates more sharply.
The dollar fell to a fresh 12-1/2-year low against the yen
and another record low against the euro.
"The market is concerned about Bear Stearns saying that
their liquidity positions has deteriorated," said Steven
Butler, director of foreign exchange trading at Scotia Capital
in Toronto. "It means things are really getting worse for the
U.S. economy."
In a sign of the fears and hopes gripping markets, major
U.S. stock indices opened higher, fell about 2 percent and then
pared half those losses in the first hour of trading.
Bear Stearns said its cash position had deteriorated
significantly over the past 24 hours. It said the funding was
arranged to restore investor confidence, strengthen the bank's
liquidity and to allow it to continue normal operations.
"This tells you we're not over the worst yet, and there are
still some players out there who are vulnerable," said Stephen
Dowds, head of international equities at Northern Trust in
London.
Investors hailed Federal Reserve efforts to address the
possibility systemic risk, but the unusual move was also cause
for concern.
"The Fed is taking all the risk in this arrangement. They
are exposing themselves to a non-member institution which is
highly unusual, if not unprecedented," said Pierre Ellis,
senior economist at Decision Economics in New York.
"Clearly the Fed is addressing what they feel is a systemic
risk very aggressively which should support market confidence
that no total market freeze will be allowed to happen."
With investors focused on wider risks to the system, the
S&P financials index <.GSPF> fell 2.8 percent.
The euro hit a new all-time record at $1.5688 <EUR=> before
easing to $1.5644, unchanged from late Thursday.
Spot gold raced higher to scale an historic peak above the
key $1,000 mark after the dollar slumped further and fell below
parity with the Swiss franc for the first time.
The credit concerns overshadowed earlier tame inflation
data and U.S. rate futures pointed to a growing chance of a 1
percentage point cut when Fed policy-makers meet on Tuesday.
The Labor Department said cheaper energy and transportation
helped keep overall consumer prices in check, a surprise after
a period of run-ups that had heightened concern over inflation.
Some analysts were skeptical, however, given the soaring
price of oil and other commodities.
"Now we can all go on imagining there's no inflation and
the Fed can continue pretending that the rate cuts aren't going
to come at a cost. So the party goes on," said Michael Darda,
chief economist at MKM Partners LLC, Greenwich, Connecticut.
Earlier in Europe financial markets had stabilized after a
week of turbulence, with the U.S. dollar inching up from
historic lows and European stocks holding steady.
The relative calm disguised investor stress over a U.S.
economic slowdown, banking strains, hedge fund failures and the
ongoing fallout from the eight-month old credit crisis.
Oil slipped below $110 as investors took profits after
prices hit a record $111 on Thursday, but the depressed dollar
was seen limiting losses.
U.S. crude for April delivery <CLc1> fell 47 cents to
$109.86 a barrel after it touched a record for the seventh time
in a row in the previous session. Oil is up nearly 8 percent
this month and about 14.5 percent this year.
London Brent crude for April <LCOc1>, which expires later
on Friday, dropped 28 cents to $107.26.
Earlier, Japan's benchmark Nikkei <> average closed at
a more than 2-1/2 year low. It closed down 1.54 percent at
12,241.60. The broader TOPIX <> closed down by 1.9 percent
at 1,193.23.
(Reporting by Herbert Lash. Editing by Richard Satran)
