* Fear of economic gloom sparks widespread safe-haven bids
* Longer bonds hold earlier gains on record drop in CPI
* Oil falls as economic gloom continues to weigh on market
* European shares at 5-1/2-year closing low
(Recasts with U.S. markets, adds byline; dateline previously
LONDON)
By Herbert Lash
NEW YORK, Nov 19 (Reuters) - U.S. shares slumped and
European shares finished at their lowest close in five and a
half years on Wednesday as the fastest drop in U.S. consumer
prices on record renewed a flight to safety, driving up bond
prices jumped sharply.
Doubts about the prospect of a U.S. auto industry rescue
also stoked fear of a deeper recession, further weighing on
stocks and helping push the dollar down against the yen.
Oil fell below $54 after an unexpectedly large build in
U.S. crude inventories also underlined falling demand and how
rapidly the economy is weakening. Oil later trended higher.
U.S. and European government debt prices rose on signs of
fading inflation after the U.S. government reported a record
drop in consumer prices in October. A fall in U.S. new home
construction to a record low also helped drive the flight to
safety.
Markets are pricing in further rate cuts with the Federal
Reserve seen cutting another 50 basis points in December
<FEDWATCH> and figures derived from Eonia rates fully pricing
in 75 basis points of European Central Bank cuts next month.
With prospects for a U.S. auto industry rescue diminishing,
shares of General Motors <GM.N> fell to a more than 60-year
low, while Ford <F.N> plunged more than 24 percent.
"There's insecurity with the bailout, the plight of GM,
Chrysler and Ford," said Alan Lancz, president of Alan B. Lancz
& Associates Inc, an investment advisory firm in Toledo, Ohio.
"There's just no catalyst to buy stocks and for the kind of
confidence we need for the market to have any sustainable
progress," he said.
Before 1 p.m., the Dow Jones industrial average <> was
down 171.16 points, or 2.03 percent, at 8,253.59. The Standard
& Poor's 500 Index <.SPX> was down 25.57 points, or 2.98
percent, at 833.55. The Nasdaq Composite Index <> was down
49.85 points, or 3.36 percent, at 1,433.42.
GM was down 15.5 percent at $2.61, after earlier falling as
low as $2.52, a level not seen since the 1940s.
Bank stocks also fell sharply, with Bank of America <BAC.N>
falling to its lowest level since July 1995, while JPMorgan
Chase <JPM.N> fell to its lowest level since May 2003.
Citigroup <C.N> slid 12 percent.
In Europe, banks and commodity shares led the market
lower.
A profit warning from BASF <BASF.DE>, the world's top
chemicals maker by revenue, the second time in two months, also
was drag. BASF said it would cut output after a "massive"
decline in demand; its shares fell 13.7 percent.
The FTSEurofirst 300 <> index of top European shares
closed 4 percent lower at 811.99 points, and is now down about
45 percent this year.
"The outlook is still very poor and the profit warning from
BASF didn't help sentiment," said Edmund Shing, a strategist at
BNP Paribas in Paris.
Banks were the worst hit, with HSBC's <HSBA.L> 9.1 percent
fall the biggest drag on the index. Santander <SAN.MC> was the
next biggest banking drag, down 10 percent, followed by BNP
Paribas <BNPP.PA>, off 11.2 percent.
Oil giants also fell, with BP <BP.L> down 3.8 percent and
France's Total <TOTF.PA> off 4.2 percent.
A 1.6 million barrel rise in crude oil inventories, twice
analysts' expectations, was just another sign in the weak
prospects for world growth.
"With no end in sight for the global economic turmoil,
traders continue to focus on the lack of demand heading into
2009," said Jonathan Kornafel, Asia director of U.S.-based
options trader Hudson Capital Energy.
"It is becoming quite evident that demand may actually drop
from 2008 to 2009."
U.S. light sweet crude oil <CLc1> rose 18 cents to $54.57
per barrel.
Analysts said many investors are staying out of the markets
until the depth of a world recession becomes clearer. The
resultant thin volume is exaggerating price moves.
"The truth is we're seeing very poor liquidity and my sense
is that a lot of people have taken their toys and gone home,"
said Firas Askari, head of currency trading at BMO Capital
Markets in Toronto.
Growing stock losses has fueled demand for longer debt
maturities as investors scramble for low-risk investments that
offer returns above inflation. Euro zone government bond
futures sprinted to their highest prices since March 2006.
British interest rate futures rallied after minutes to this
month's Bank of England meeting showed policy-makers had
discussed cutting rates by more than the 1-1/2 percentage
points they did cut, raising bets on further cuts ahead.
"The minutes offer support for our expectations of further
significant cuts," said Moyeen Islam, strategist at Barclays
Capital. "Now the question is how much lower the bank might
go."
The benchmark 10-year U.S. Treasury note <US10YT=RR> was up
36/32 in price to yield 3.40 percent. The 2-year U.S. Treasury
note <US2YT=RR> was little changed to yield 1.13 percent.
The dollar rose against a basket of major currencies, with
the U.S. Dollar Index <.DXY> up 0.32 percent at 87.387. Against
the yen, the dollar <JPY=> fell 0.38 percent at 96.59.
The euro <EUR=> fell 0.40 percent at $1.2571,
Spot gold prices <XAU=> fell $2.95 to $733.40 an ounce.
Overnight in Asia Japan's Nikkei average <> slipped
0.7 percent, while the MSCI index of Asia-Pacific stocks
outside of Japan <.MIAPJ0000PUS> fell 0.3 percent and was not
far from a four-and-a-half-year low hit last month.
(Reporting by Ellis Mnyandu, Richard Leong and Steven C.
Johnson in New York and Atul Prakash, Emelia Sithole-Matarise
and Ikuko Kao in London; writing by Herbert Lash; Editing by
Leslie Adler)
