(Adds close of U.S. markets)
By Herbert Lash
NEW YORK, March 14 (Reuters) - Investor confidence took a
fresh body blow on Friday as an emergency funding plan to
rescue Wall Street's fifth biggest broker Bear Stearns <BSC.N>
hammered global equity markets and boosted safe-haven flows to
government bonds and inflation hedges like gold.
U.S. stocks tumbled more than 2 percent, wiping out much of
the gains from the biggest rally on Wall Street in five years
earlier in the week, as fears darkened about a credit crisis.
"It's very clear that there is deepening concern about the
credit crisis. Most investors believe that there are more shoes
to drop," said Hugh Johnson, chief investment officer of
Johnson Illington Advisors in Albany, New York.
The stock of Bear Stearns shed 40 percent of its value and
dragged down other financial shares in a volatile session on
the stunning news that the New York Federal Reserve Bank had
intervened along with JPMorgan Chase on the rescue package.
Investors piled into the relative safety of U.S. Treasuries
and European government debt as equity markets plunged. Bond
yields fell as some investors speculated the Fed will now cut
interest rates more sharply when policy-makers meet next week.
The dollar fell to a fresh 12-1/2-year low against the yen
and yet another record low against the euro amid growing
concerns that the U.S. economy is in for a long recession and
its interest rate differential with Europe will widen.
U.S. rate futures now point to a growing possibility of a
full percentage point rate cut at Tuesday's Fed meeting, after
anticipating one half that size earlier in the week.
The Bear Stearns news furthered a recent move into the
safer assets and gold which have been benefiting from the
shakiness of other investments. Daniel Hynes, a metals analyst
at Merrill Lynch, said, "That has been a key driver of gold
over the last couple of months. So this announcement just adds
fuel to that fire."
The metal has gained more than 20 percent this year on top
of a 32 percent gain in 2007. Gold touched a record peak above
$1,000 for a second day.
The Dow Jones industrial average <> closed down 1.6 per
cent at 11,951.09, according to unofficial figures. The Standard
& Poor's 500 Index <.SPX> fell 2.08 percent at 1,288.14 and the
Nasdaq <> declined 2.26 percent at 2,212.49.
An initial announcement that JPMorgan Chase would provide
financing to Bear Stearns lifted European shares and U.S. index
futures, on the view that a white knight had stepped up.
But later statements that said the firm's cash position had
deteriorated and the Federal Reserve Bank of New York also was
part of the emergency funding plan soured investor sentiment.
A plunge in the bank stock price took down other financial
shares. Lehman Brothers Holdings Inc <LEH.N> fell 13 percent,
Citigroup lost almost 6 percent and Morgan Stanley <MS.N> more
than 4 percent.
Its shares were down 46 percent at $30.90, after falling as
low as $28.42.
Bear Stearns has long been seen on Wall Street as one of
the institutions hardest hit by a housing-sparked credit crisis
that has slammed financial markets for months, a suspicion that
appeared validated by the day's developments. But it had
maintained it was in no trouble and the suddenness of the
bailout surprised many and led to fears of wider troubles that
have not been revealed elsewhere.
"This is certainly not a contained development. Other firms
will likely continue to suffer the results of the credit crunch
and loss of investor confidence," said Sherry Cooper, global
economic strategist at BMO Financial Group in a research
note.
Another large company exposed to the housing crisis,
Washington Mutual <WM.N>, had its debt downgraded by Moody's
Investors Service to one notch above junk status, sending
shares of the largest U.S. savings and loan down more than 11
percent.
News of the emergency financing also pulled down European
shares. The FTSEurofirst 300 index <> closed down 1.1
percent at 1,255.02 points, with more than two-thirds of its
constituents falling.
Amid the fresh wave of investor jitters mining stocks rose
in Europe amid climbing metal prices.
Rio Tinto <RIO.L> rose 2.6 percent, BHP Billiton <BLT.L>
3.4 percent and Xstrata <XTA.L> 1.4 percent.
The euro hit the new all-time record at $1.5688 <EUR=>
before easing to $1.5644, unchanged from late Thursday, and
fell below parity with the Swiss franc <CHF=> for the first
time.
The credit concerns overshadowed earlier tame inflation
data that cheered investors and initially lifted European
shares and U.S. index futures.
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.
U.S. crude <CLc1> settled down 12 cents to $110.12 a barrel
in volatile trade after touching a record for the seventh time
in a row on Thursday.
London Brent <LCOc1> hit a record of $108.02 a barrel
before easing back to $107.45.
Crude is up nearly 8 percent already in March and about
14.5 percent this year.
Gold <XAU=>, seen as a safe-haven asset during financial
and political troubles, surged to $1,009 an ounce.
The active gold contract for April delivery <GCJ8> in New
York settled up $5.70 at $999.50 an ounce.
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)
