(Recasts with U.S. markets, adds byline; dateline previous
LONDON)
By Herbert Lash
NEW YORK, March 6 (Reuters) - Resurgent credit worries
upended financial markets in Europe and the United States on
Thursday and the dollar tumbled to new lows as the European
Central Bank's hawkish inflation statements raised concerns
over a widening trans-Atlantic interest rate gap.
A steady flow of chilling news and speculation, including
talk that UBS <UBSN.VX> was trying to offload $24 billion of
less-than-prime mortgages, put dealers on edge and pushed up
safe-haven U.S. government debt.
The dollar fell to lifetime lows against the euro and oil
held firm after hitting a new high near $106 as the weak dollar
helped extend gains from the previous day. Gold retreated from
record highs set the day before.
News that U.S. home foreclosures rose to record highs in
the fourth quarter also added to bearish investor sentiment
across equity, debt and currency markets.
"The big story in the market is the forced liquidation of
mortgage securities, which is just driving everything," said
Carl Lantz, U.S. interest-rate strategist with Credit Suisse in
New York. "It is driving a flight-to-quality bid," he said.
European shares closed down 1.4 percent and major U.S.
indices were more than 1 percent lower a midday, pulled down by
default notices at U.S. home lender Thornburg Mortgage and
aDutch-listed affiliate of private equity firm Carlyle Group.
The Dow Jones industrial average <> was down 140.02
points, or 1.14 percent, at 12,114.97. The Standard & Poor's
500 Index <.SPX> was down 19.67 points, or 1.47 percent, at
1,314.03. The Nasdaq Composite Index <> was down 26.18
points, or 1.15 percent, at 2,246.63.
Michael Metz, chief investment strategist at Oppenheimer &
Co in New York, said the U.S. economy has never been as
leveraged, and with real estate prices declining, pressure on
consumers to pay back debts is rising.
"This is the worst I've ever seen because there really are
systemic risks, and unfortunately we come off a period where
the secret to American prosperity was leverage, nothing more,
nothing less," said Metz, who has been active in the financial
markets since the Arab oil embargo of 1973.
"The bottom line is we have to go through a market process
of de-leveraging and it's going to be painful and protracted."
The credit market pressures pushed spreads for some debt
products to all-time highs. U.S. Treasuries prices jumped,
meanwhile. as investors snapped up the government securities as
safe havens against repayment failures.
Shares of mortgage lender Thornburg plummeted on worries it
might go bankrupt after the provider of jumbo loans failed to
meet a $28 million margin call from JPMorgan Chase & Co,
triggered defaults under other lending agreements.
Margin calls force borrowers to pay back loans or post more
collateral. Thornburg shares, which traded above $27 before it
was hit by the credit crunch last summer, plunged 60 percent to
$1.36 in morning trading.
Money manager Carlyle Capital Corp <CARC.AS> said it
received margin calls totaling more than $37 million from seven
parties on Wednesday and was unable to meet the demands for
extra collateral to cover market positions for four of them. As
of February Carlyle Capital had a $21.7 billion portfolio of
U.S. mortgage-backed securities issued by Fannie Mae <FNM.N>
and Freddie Mac <FRE.N>.
The FTSEurofirst 300 index <> closed unofficially
down 1.4 percent at 1,282.77 in a volatile session mirroring
losses in U.S. markets.
Banks once again were the biggest drag on the index,
suffering from the credit market pressures. HSBC <HSBA.L>, ING
<ING.AS>, BNP Paribas <BNPP.PA> and Barclays <BARC.L> fell
between 2.7 and 4.7 percent, finding little respite from ECB
President Jean-Claude Trichet's comments that he would do what
was needed on prices in the medium-term.
Earlier, Japan's Nikkei average rose 1.9 percent on
Thursday, partly because the yen was stabilising yen and
Japanese exporters thus gaining.
The benchmark Nikkei average <> ended at 13,215.42,
one day after logging its lowest close since Jan. 23. The
broader TOPIX index <> added 1.9 percent to 1,287.55.
MSCI's main world equity index <.MIWD00000PUS> slipped 0.53
percent at 365.28.
The ECB left interest rates at 4.0 percent for the ninth
month running, and while some analysts said Trichet's remarks
were a small step toward an easing monetary policy, others were
less sure.
"We continue to see the ECB hunkered down at the sidelines
for the remainder of this year," said Richard McGuire, a fixed
income strategist at RBC Capital Markets.
The euro jumped to $1.5378 <EUR=>, its highest level since
its launch in 1999.
The New York Board of Trade's dollar index, which tracks
the dollar's performance against a basket of six currencies,
tumbled to a lifetime low of 72.963 <.DXY>, according to
Reuters data.
The price of the benchmark 10-year note <US10YT=RR> jumped
24/32 for a yield of 3.59 percent, down from 3.68 percent late
on Wednesday.
The 2-year note <US2YT=RR> gained 6/32 for a yield of 1.53
percent compared with 1.64 percent late Wednesday.
U.S. light crude for April delivery <CLc1> struck a new
record high of $105.96 a barrel after U.S. crude settled $5.00
higher on Wednesday.
London Brent crude <LCOc1> was up 79cents at $102.43, after
setting a record high of $102.95.
Spot gold <XAU=> jumped as high as $991.90 an ounce and was
quoted at $984.40/985.70 at 1603 GMT, up from an earlier low of
$959.45, but below the $985.70/986.50 late on Wednesday.
(Writing by Herbert Lash. Editing by Richard Satran)
