* U.S. stocks rise on encouraging Cisco results, outlook
* Dollar hits seven-month high vs yen on recovery hopes
* Oil drops towards $117 after U.S. inventory data
(Adds close of U.S. markets)
By Herbert Lash
NEW YORK, Aug 6 (Reuters) - Oil slid again on Wednesday to
almost $117 a barrel, helping U.S. stocks rebound and lifting
the dollar to a seven-month high against the yen, while
European equities rose on a rally in bank stocks.
Demand for the euro fell ahead of a European Central Bank
meeting on Thursday, when euro zone policy-makers are widely
expected to hold the ECB's key lending rate at 4.25 percent.
Against a backdrop of data painting a bleak economic
picture amid rapidly falling oil prices, investors have sharply
trimmed bets of the ECB raising interest rates any time soon.
Rising U.S. crude inventories provided more evidence of a
demand slowdown in the world's top consumer that's chopped $30
off the price of oil since it set an all-time high in July.
Oil's sharp fall helped overshadow the deep morass in
housing, made visible again on Wednesday when home finance
company Freddie Mac <FRE.N> posted an unexpectedly wide loss
and led U.S. stocks lower early in the session.
Stronger-than-expected quarterly results at Cisco Systems
Inc <CSCO.O> and the company's comments that it expects the
weak economic environment to be relatively short lived helped
U.S. stocks later rebound.
"People were encouraged by what Cisco had to say. There's a
different mind-set, even though the Freddie Mac news was pretty
bleak," said Dave Rovelli, managing director of U.S. equity
trading at Canaccord Adams in New York.
"All big-cap tech is seeing strength. What is also bullish
today is the talk that Microsoft might be buying back $20
billion worth of stock. That's a very good sign."
Financial shares slid after Freddie Mac posted its fourth
straight quarterly loss and equity investors braced for more
fallout from the prolonged U.S. housing slump.
Freddie Mac said it would set aside twice as much money for
bad loans and slash its dividend at least 80 percent.
Freddie Mac's shares fell more than 19 percent, while those
of bigger rival Fannie Mae <FNM.N> declined nearly 15 percent.
The two companies, which hold or guarantee nearly half the
$12 trillion in outstanding U.S. mortgages, have been pummeled
by the housing downturn. The S&P 500 financial index <.GSPF>
was off nearly 1 percent.
"Freddie Mac was not a vitamin pill this morning. It
clearly wasn't good news," said Stephen Massocca, co-chief
executive at San Francisco-based investment bank Pacific Growth
Equities.
"When you lower the dividend, people get out of the stock
for that reason."
The Dow Jones industrial average <> added 40.30 points,
or 0.35 percent, at 11,656.07. The Standard & Poor's 500 Index
<.SPX> rose 4.31 points, or 0.34 percent, at 1,289.19. The
Nasdaq Composite Index <> gained 28.54 points, or 1.21
percent, at 2,378.37.
European stocks rose in relatively calm trade with banks
gaining ground after BNP Paribas <BNPP.PA> delivered earnings
that were better than expected and commodity shares rallied on
Xstrata's <XTA.L> $10 billion bid for Lonmin <LMI.L>.
The FTSEurofirst 300 <> index of top European shares
closed 0.9 percent higher at 1192.99 points, tapping a 7-week
closing high.
Banks were among the biggest risers. BNP Paribas gained 5.2
percent, Societe Generale <SOGN.PA> added 3 percent and UBS
<UBSN.VX> rose 3.7 percent. But Commerzbank <CBKG.DE> fell 1.5
percent as investors expressed disappointment over its outlook
despite solid second-quarter numbers.
The DJStoxx European Banks index <.SX7P> rose 1.2 percent.
"The results from BNP and Commerzbank were OK, which
helped, and the Federal Reserve also reassured at the margins,"
said Bernard McAlinden, market strategist at NCB Stockbrokers
in Dublin.
The Fed on Tuesday kept its benchmark federal funds rate
steady at 2 percent and signaled in a statement that it is in
no rush to push borrowing costs higher.
The statement helped U.S. equity markets rally almost 3
percent on Tuesday and boosted the dollar on the belief that
steady rates should bolster the flagging U.S. economy.
"The U.S. economy is showing some signs of recovery and oil
prices falling do help," said Meg Browne, a currency strategist
at Brown Brothers Harriman in New York. "Going into the end of
the year and into 2009, the tip will be moving in favor to the
U.S. dollar."
Oil slid to another three-month low after government data
showed bigger-than-expected increases last week in crude and
distillate stocks in the United States, the world's top
consumer of fossil fuels.
U.S. light crude <CLc1> fell 59 cents to settle at $118.58
a barrel after hitting a low of $117.11, the lowest since early
May and off a record $147.27 that was struck on July 11.
London Brent crude <LCOU8> fell 92 cents to $116.78 a
barrel.
The drop came after a report from the U.S. Energy
Information Administration showed crude stocks in the world's
biggest energy consumer rose rose by 1.7 million barrels in the
week to Aug. 1, well above analysts' forecasts for a
300,000-barrel build.
Gold initially rose 1 percent in Europe as investors bought
the metal after a three-day fall in prices to buy below the key
$900 an ounce level. Investors interpreted the Fed's statement
on Tuesday as indicating it is in no hurry to hike rates.
The December <GCZ8> contract for gold ended down $3.10 at
$883.00 an ounce in New York.
The dollar rose against major currencies, with the U.S.
Dollar Index <.DXY> up 0.46 percent at 74.287. Against the yen,
the dollar <JPY=> rose 1.41 percent at 109.82.
The euro <EUR=> fell 0.29 percent at $1.5411.
U.S. government debt prices fell as investors sold
Treasuries to make room for $17 billion of new 10-year debt and
unwound mortgage-related hedges after Freddie Mac unveiled new
steps to boost capital.
Investors often buy and sell Treasuries and interest rate
swaps to hedge against changing values on mortgage bonds.
Concerns about the lack of buying support from Freddie Mac
led traders to unload mortgage-backed securities and related
Treasury hedges, analysts said.
U.S. Treasury debt prices were lower.
The benchmark 10-year U.S. Treasury note <US10YT=RR> fell
4/32 to yield 4.04 percent. The 30-year U.S. Treasury bond
<US30YT=RR> fell 19/32 to yield 4.68 percent.
Asian shares rebounded from a three-session losing streak.
The MSCI index of Asian stocks outside Japan <.MIAPJ0000PUS>
gained 1.7 percent after hitting its lowest since March 2007 on
Tuesday. Tokyo's Nikkei benchmark <> rose 2.6 percent.
(Reporting by Steven C. Johnson, Vivianne Rodrigues and
Richard Leong in New York and Emelia Sithole-Matarise, Patrizia
Kokot, Santosh Menon and Jan Harvey in London; Writing by
Herbert Lash; Editing by James Dalgleish)
