(Updates with close of U.S. markets)
By Herbert Lash
NEW YORK, April 2 (Reuters) - U.S. stocks and U.S. Treasury
debt edged lower on Wednesday as comments by Federal Reserve
Chairman Ben Bernanke raised fears of a U.S. recession and
prompted differing outlooks on interest rate policy.
In testimony before a Congressional panel that gave
investors an array of observations to drive sentiment to their
liking, Bernanke said U.S. economic growth should pick up later
this year -- after possibly dipping into recession.
U.S. government debt fell on concerns a pick-up in growth
later in the year could lead Fed policy-makers to halt their
interest rate-cutting campaign, which also drove down the
dollar against most currencies.
"Bernanke provided a gentle reality check with his reminder
that interest rates are probably going to be cut again and that
the risk of a recession is still here," said Ashraf Laidi,
chief market analyst at CMC Markets in New York.
In Europe, stocks closed higher as hopes that losses
related to subprime mortgages were coming to an end offset the
impact of Bernanke's comments. Bank shares drove gains in
Europe. Tuesday's $19 billion write-down by Swiss bank UBS,
rather than fueling concerns about fallout from the credit
crisis, raised hopes that banks were aggressively cleaning up
their books.
Oil surged almost $4 to near $105 a barrel after a U.S.
government report showed a steep draw in U.S. refined fuel
inventories as the United States, the world's top oil consumer,
gears up for the summer driving season. Gold futures in New
York ended sharply higher, also driven by Bernanke's comments
about a possible recession.
U.S. stocks fell amid profit-taking, after turning higher
earlier in the day, after a rally on Tuesday that pushed major
indexes in the United States and Europe more than 3 percent
higher.
General Electric <GE.N> and IBM <IBM.N>, which are
sensitive to the economic outlook, were among the biggest drags
on major U.S. stock indexes.
Bernanke's cautious comments set the session's tone.
"People realized we are late in the cycle of the Fed
cutting interest rates. Now people are asking how many more
cuts are left," said Richard Schlanger, portfolio manager at
Pioneer Investments USA in Boston.
All three major U.S. stock gauges fell. The Dow Jones
industrial average <> slipped 45.44 points, or 0.36
percent, to 12,608.92. The Standard & Poor's 500 Index <.SPX>
fell 2.65 points, or 0.19 percent, to 1,367.53. The Nasdaq
Composite Index <> fell 1.35 points, or 0.06 percent, at
2,361.40.
Bernanke said the U.S. economy could contract in the first
half of this year, supporting suspicions of many that it might
already be in recession, and unemployment would move higher.
BANKS DRIVE EUROPEAN STOCKS HIGHER
In Europe, the FTSEurofirst 300 index <> closed up
1.2 percent to a five-week closing high of 1,317.84 points.
Among European banks, UBS <UBSN.VX> added 4.9 percent,
Credit Suisse <CSGN.VX> gained 5.8 percent and Commerzbank
<CBKG.DE> rose 6.1 percent.
MSCI's main world equity index <.MIWD00000PUS> rose 1.23
percent to its highest level since late February.
U.S. Treasuries fell as bond prices also succumbed to
selling from investors to make room for this week's corporate
debt issues and hedging from dealers to lock in the yields.
An industry report that showed surprise growth in private
U.S. payrolls in March also weighed on bond prices, supporting
the view that the economy is not spiraling into a recession.
In other economic reports, new orders at U.S. factories
fell for the second month in a row in February and by a much
larger-than-expected 1.3 percent, a government report showed.
Orders for durable goods, items intended to last three
years or longer, fell 1.1 percent, revised up from -1.7
percent reported March 26, the Commerce Department said.
The short-end of U.S. Treasury debt prices fell while the
price of longer maturities was unchanged.
The benchmark 10-year U.S. Treasury note <US10YT=RR> fell
12/32 to yield 3.602 percent, and the 2-year U.S. Treasury note
<US2YT=RR> fell 7/32 to yield 1.9066 percent.
The 30-year U.S. Treasury bond <US30YT=RR> was unchanged to
yield 4.4012 percent.
Oil gains snapped three days of losses and came even as
U.S. crude oil stocks posted their biggest weekly increase in
four years.
Adding to oil's gains earlier in the session, the dollar
softened against the euro. A weak dollar can support nominal
prices for all commodities denominated in the currency.
U.S. crude futures <CLc1> settled up $3.85 at $104.83 a
barrel after touching $105.10 in earlier activity. London Brent
crude <LCOc1> gained $3.58 to settle at $103.75 a barrel.
Currency traders bet late in the session that Fed
policy-makers will have to cut interest rates again to spark a
rebound in the second half of the year.
Bernanke "is saying the economy seems to be in the midst of
a recession and is suggesting the Fed has given itself more
leeway to cut rates, which is obviously weighing on the
dollar," said Samarjit Shankar, director of global FX strategy
at The Bank of New York Mellon in Boston.
The Fed chief's comments lifted the euro to $1.5685 <EUR=>,
up 0.5 percent on the day, and erased dollar gains against
other major European currencies seen during the prior session.
The dollar fell against a basket of major trading-partner
currencies, with the U.S. Dollar Index <.DXY> down 0.40 percent
at 72.241. The euro <EUR=> rose 0.47 percent to $1.5683, and
against the yen <JPY=> it gained 0.56 percent to 102.40.
New York spot gold prices <XAU=> rose $15.50, or 1.76
percent, to $898.60.
(Editing by Leslie Adler)
