(Adds U.S. market, byline; dateline previous LONDON)
By Herbert Lash
NEW YORK, Feb 22 (Reuters) - U.S. stocks fell on Friday as
a broker downgrade of the two biggest U.S. home-funding
companies signaled the likelihood of further deterioration in
credit markets, intensifying fears of a recession in the
world's largest economy.
Safe-haven U.S. government debt rose on the stock market's
decline, and spurred by a fresh round of poor U.S. economic
data, the dollar fell to a three-week low against the euro.
Data showing growth in euro zone services also underpinned the
strength of the single European currency.
European shares fell as downbeat results from Germany's RWE
<RWEG.DE> hit utilities and as fears of a U.S. recession hurt
banks. In Japan, shares also fell on fears of a U.S. recession
and shares of exporters fell as the yen strengthened.
Merrill Lynch recommended investors sell Fannie Mae <FNM.N>
and Freddie Mac <FRE.N>, the largest U.S. home-funding
companies, as they face more pain due to further deterioration
in financial markets and weakening credit conditions.
The downgrades were the latest dismal new for the U.S.
financial sector, which is suffering from defaults in the
subprime mortgage market and tightening credit markets.
"The big issue is, 'Where is the subprime problem going to
pop up again?'" said Lincoln Anderson, chief investment officer
at LPL Financial Services in Boston.
Shares of Fannie Mae, the largest home financing company,
fell 4.7 percent and No. 2 Freddie Mac dropped 8.4 percent. The
S&P 500 financial index <.GSPF> was down 1.2 percent.
The release of revised data for U.S. wholesale price
inflation appeared less severe, but the calculations do not
affect unadjusted data, which still shows its Producer Price
Index on a sharp ascending trend.
Compared with December 2006, overall producer prices were
up 6.3 percent last year for the largest increase since a 7.1
percent advance in 1981, the U.S. Labor Department said.
The department said that wholesale price inflation was more
muted at the end of 2007 than previously thought.
The department said PPI, a gauge of price changes at the
farm gate and factory door, dropped by 0.3 percent in December
instead of 0.1 percent that it reported on Jan. 15.
November producer prices that had originally been reported
rising sharply by 3.2 percent instead were up by a somewhat
more modest 2.6 percent, the department said.
EUROPEAN SHARES FALL
In Europe, shares of RWE, Germany's second largest utility,
fell nearly 6.5 percent after the company reported
disappointing earnings and said earnings could be unchanged
this year. The news hit shares of rival utility E.ON <EONG.DE>
and others.
The FTSEurofirst 300 index <> of top European shares
ended down 0.8 percent at 1,320.04 points, and is now off
almost 13 percent since the start of the year.
The broader European market gained for the second week in a
row, but sentiment has been plagued by worries about the U.S.
economy and corporate profitability.
"The markets are being pulled between information on the
here and now, which is quite discouraging, and hopes that more
aggressive action to try to reflate the U.S. economy in say
nine months time, things will look a lot better," said Andrew
Bell, a European strategist at Rensburg Sheppards.
Financials, which have borne the brunt of the fallout from
the U.S. subprime crisis, were mixed.
Lloyds TSB <LLOY.L> raised the write-down on its exposure
to risky assets to 280 million pounds but a 6 percent rise in
underlying 2007 profit and an increase in its dividend boosted
the stock 4.8 percent.
France's BNP Paribas <BNPP.PA> fell 0.8 percent and
Germany's Postbank <DPBGn.DE> gained 1.7 percent. UBS <UBSN.VX>
shares lost 1.9 percent.
Oil fell below $98 a barrel, handing back early gains in
choppy trading, as falling U.S. stock markets put the focus
back on economic woes in the world's largest oil consumer.
U.S. crude oil futures for April delivery <CLc1> rose 79
cents to $99.02 a barrel, as prices seesawed amid concerns
about about economy and supply worries related to an incursion
into Iraq by Turkish troops. A rise in heating oil futures on
colder weather supported prices. London Brent crude <LCOc1>
gained 6 cents to $96.30 a barrel.
The dollar declined to three-week lows against the euro as
the euro zone's surprising growth in the service sector showed
a clear contrast with the flagging U.S. economy. The data
dampened expectations the European Central Bank will cut
interest rates in the near term, in contrast to expectations of
further rate cuts by the U.S. Federal Reserve.
Long-dated U.S. Treasuries edged higher following a strong
rally the previous session that was triggered by a survey of
mid-Atlantic business conditions showing activity at its lowest
level since the 2001 recession.
Treasuries rallied on Thursday after the Philadelphia
Federal Reserve's business conditions index contracted for the
third straight month, pointing to a manufacturing recession.
Traders took profits on yield-curve steepening trades that
had pushed the gap between two- and 10-year yields to 192 basis
points, the widest gap in almost four years, traders said.
The fundamental argument for yield curve steepening is that
the Fed continues to cut benchmark short-term interest rates to
limit an economic slowdown while inflation readings remain firm
enough to require a premium for long-dated bonds.
(Editing by Leslie Adler)
