(Recasts with U.S. markets, adds byline; dateline previous
LONDON)
By Herbert Lash
NEW YORK, Feb 28 (Reuters) - Equities fell in Europe and
the United States on Thursday as the dollar dropped to a new
low against the euro amid more signs of a possible U.S.
recession.
Fears that the worst has yet to arrive in the battered U.S.
housing sector and a fourth quarter update on gross domestic
product showing weakness lifted U.S. Treasury prices as
investors scrambled for safety.
Financial markets were hit by reports that the U.S. economy
barely expanded, with growth at just 0.6 percent and that the
number of workers filing claims for jobless aid jumped last
week. Testimony by Federal Reserve Chairman Ben Bernanke did
little to help sentiment.
A safety-first sentiment set in among investors after
Freddie Mac, the second-largest U.S. provider of mortgages,
posted a wider-than-expected quarterly loss of $2.5 billion.
The worries of credit risks were fanned as Federal Reserve
Chairman Ben Bernanke said in testimony to the Senate that some
small banks may go under as the housing slump takes its toll,
although the U.S. banking system overall remained solid.
He added that the U.S. central bank is in a more difficult
position now to respond to a slowing economy than it was during
the last U.S. economic slowdown in 2001 following the bursting
of the stock market bubble.
Bernanke's comments accelerated a fall in European and U.S.
shares, with the major European stock indices closed down
almost 2 percent and major U.S. indices were down more than 1
percent at midday. U.S. government debt surged.
Bond prices also jumped in the flight to safety and on the
weak economic data.
"There's ongoing flight to safety in Treasuries because of
credit risk. Equities look softer and we've got discouraging
earnings reports from companies like Freddie Mac," said Kim
Rupert, managing director of global fixed income analysis with
Action Economics in San Francisco.
By midday in New York, benchmark 10-year notes <US10YT=RR>
were up 34/32, yielding 3.72 percent, down from 3.85 percent
late on Wednesday. The yield had peaked at 3.96 percent last
week, a high for the year and sharply up from the 4-1/2-year
low of 3.2850 percent struck last month. Bond yields move
inversely to prices.
The Dow Jones industrial average <> was down 128.79
points, or 1.01 percent, at 12,565.49. The Standard & Poor's
500 Index <.SPX> was down 12.74 points, or 0.92 percent, at
1,367.28. The Nasdaq Composite Index <> was down 21.59
points, or 0.92 percent, at 2,332.19.
European shares fell as financial stocks were weighed by
renewed worries about a U.S. recession and Bernanke's remarks
about possible bank failures.
The FTSEurofirst 300 index of top European shares ended
unofficially 1.8 percent lower at 1,333.99 points.
Earlier, Japan's Nikkei <> lost 0.8 percent, while
MSCI's measure of other Asian stock markets <.MIAPJ0000PUS>
edged 0.2 percent lower.
MSCI's main world equity index <.MIWD00000PUS> slipped 0.69
percent.
Cash was also moving into commodities again, as gold,oil
and some agricultural futures were trading near records.
Investors have pumped cash into commodities in recent
weeks, betting the Fed will keep cutting interest rates to prop
up the flagging U.S. economy.
Oil rose toward $102 a barrel, trading within sight of a
record set earlier in the week, as the dollar sank to new lows
and after militants cut supply from Nigeria, Africa's top
exporter.
"The energy complex is a dollar/inflation story as
investors have moved into commodities as a hedge against
inflation," said Nauman Barakat, senior vice president at
Macquarie Futures USA.
"The ever-weakening dollar, upward inflationary pressures
and geopolitical tensions are having a greater impact on the
(energy) market than the fundamentals."
The euro rose above $1.52 for the first time in its
nine-year history as investors bet U.S. interest rates are set
to fall further as Europe's benchmark rate stays unchanged.
The euro <EUR=> hit a high at $1.5204, according to
Reuters data, before retreating slightly.
Gold raced up to a historic high above $965 an ounce as the
dollar's slump and strong oil prices boosted investor buying,
analysts said.
Silver hit a 27-year peak above $19.75 an ounce, palladium
hit a 6-1/2-year high and platinum bounced back after falling
more than 2 percent to a one-week low.
Spot gold <XAU=> rose as high as $968.20 an ounce and was
at $965.90/966.70 at 1730 GMT.
"Gold is pretty much tracking the euro/dollar moves and
funds and investors will keep buying the metal until it gets to
$1,000 an ounce," said David Thurtell, an analyst at BNP
Paribas.
(Reporting by Herbert Lash. Editing by Richard Satran)
