(Adds details, updates prices)
NEW YORK, March 31 (Reuters) - U.S. stocks gained on Monday
as a regulatory overhaul in Washington propped up financial
shares, but shares in Europe closed lower as renewed concern
about the credit crunch hit bank stocks.
But the close of the first quarter saw a dismal performance
for stocks in both the United States and Europe. Among U.S.
indexes, the bluechip Dow fell 7.55 percent in the quarter,
while stocks in Europe had their worst quarterly performance in
over five years.
The persistent concerns about the global banking system
also drove up prices of U.S. government bonds, capping their
best quarter in five and a half years.
And in foreign exchange markets, the euro came close to a
record high against the dollar as higher-than-forecast
euro-zone price data reinforced expectations that the European
Central Bank will not start cutting interest rates soon.
The dollar was headed for its biggest quarterly loss
against the euro in four years.
In U.S. stocks, the three major indexes closed higher as
investors exhibited cautious optimism regarding a White House
plan to boost the Federal Reserve's role in overseeing
financial institutions.
But there was broader skepticism that this and other
measures to unclog the banking system, such as massive
liquidity injections from global central banks, would do the
trick.
"The Fed measures are lending some stabilization to the
market, but it doesn't seem like the financing aspect for banks
is getting any better," said Sean Murphy, bond trader with RBC
Capital Markets in New York.
The Dow Jones industrial average <> was up 46.49
points, or 0.38 percent, at 12,262.89. The Standard & Poor's
500 Index <.SPX> was up 7.48 points, or 0.57 percent, at
1,322.70. The Nasdaq Composite Index <> was up 17.92
points, or 0.79 percent, at 2,279.10.
Equities found some comfort in data from Chicago purchasing
managers showing that the Midwest factory sector, while still
contracting, was do so at less severe pace.
In Europe, the pan-European FTSEurofirst 300 index closed
down 0.26 percent at 1,262.14 points. The index is now down for
five straight months, its worst run since a six-month stretch
of declines from April to September 2002.
Banks were the worst performing sector in Europe after a
Merrill Lynch research note said Switzerland's UBS<UBSN.VX>,
one of the biggest casualties of the credit crunch among
Europe's large banks, may see further write-downs.
"You can break the market down into two components. You've
got the credit crunch affecting financials and then you've got
the economic slowdown," said Kevin Lilley, a portfolio manager
at Royal London Asset Management who helps manage 1.1 billion
euros ($1.74 billion).
"We are now five years into this economic cycle and I think
people's estimates are way, way too high," he said, adding: "It
is difficult to see the market making major headway when there
are going to be major downgrades coming through."
UBS shares fell as much as 4.8 percent after Merrill Lynch
said it expected the bank to make a further $11 billion of
first-quarter write-downs, resulting in a loss of 8.2 billion
Swiss francs ($8.22 billion) in the first three months.
UBS ended down just 0.4 percent on Monday but has fallen
nearly 50 percent this quarter, bearing the brunt of investor
panic over write-downs.
The barrage of bad news from the banking sector was
unrelenting. Over the weekend, Lehman Brothers <LEH.N> became
embroiled in what it says was a fraudulent scam in Japan that
the firm claims cost it $352 million.
The dispute arose as Lehman has been beset by market rumors
that it could see a run on the bank similar to the one that
dragged down rival Bear Stearns <BSC.N>. Lehman has said it has
more than enough capital to do business in the current
environment.
Persistent worries about the global financial system,
bolstered Treasury debt prices, with benchmark 10-year notes
<US10YT=RR> up 7/32 and offering a yield of 3.41 percent, down
three basis points.
The need for funding by cash-strapped banks and other
financial institutions put upward pressure on short-term
borrowing costs as the first quarter drew to a close.
"From a credit market perspective, we still have a rocky
road ahead, but much of the mess is behind us," Andrew Harding,
director of taxable bonds at Allegiant Asset Management in
Cleveland.
A reversal in the record-prone commodities sector
continued, meanwhile, with oil prices plunging $5 to below $101
a barrel on expectations Iraqi oil flows disrupted by a bomb
attack last week would be fully restored over the next day.
The drop in energy prices dented gold's appeal as a hedge
against oil-led inflation.
In metals, June gold <GCM8> closed down $15 or 1.6 percent
at $921.50 an ounce.
The losses in gold and crude oil came as the dollar
reversed earlier losses against the euro, which had earlier
flirted with record highs on expectations that the ECB would
not start cutting interest rates soon.
A report showing annual euro zone consumer prices rose in
March at their fastest pace since the euro was launched in 1999
earlier sent it as high as $1.5895, just shy of a record high
set two weeks ago, before investors booked profits and pushed
it back to $1.5776 <EUR=> in late New York trade.
"The euro's upward trend lost some momentum today but that
doesn't change the underlying bearish dollar sentiment," said
Matthew Strauss, currency strategist at RBC Capital Markets in
Toronto.
"To call a bottom now is still a very risky call. It's too
early to say the worst is behind us and the dollar's in for a
sharp rebound."
(Additional reporting by Steven C. Johnson and Richard Leong;
Writing by Lucia Mutikani; Editing by Leslie Adler)
