GLOBAL MARKETS-Global stocks slide, gold rises on recession fear

Wed Oct 15, 2008 1:12pm EDT

* Global stocks slide as fears of worldwide slowdown mount

* Gold, bonds, yen all rise as risk aversion returns

* Oil prices slip to 13-month lows on recession worries (Adds close of European markets, Bernanke, freshens pricings)

By Herbert Lash

NEW YORK, Oct 15 (Reuters) - Stocks plunged and oil prices dove to 13-month lows on Wednesday after a new batch of U.S. economic data rattled investors who increased their aversion to risk on growing signs of a deeper worldwide slowdown.

Shorter-term U.S. and euro-zone government debt rose, gold prices jumped more than 1 percent and the less-risky yen gained after reports on U.S. retail sales and manufacturing activity in New York state intensified fears the U.S. economy is in recession.

Major European stock indexes closed down more than 7 percent and U.S. shares, as measured by the broad S&P 500, dropped more than 5 percent after Federal Reserve Chairman Ben Bernanke said the U.S. economy faces major headwinds.

"By restricting flows of credit to households, businesses, and state and local governments, the turmoil in financial markets and the funding pressures on financial firms pose a significant threat to economic growth," Bernanke said in remarks to the Economic Club of New York.

Bernanke said the U.S. central bank would continue to act aggressively to fight the worst financial crisis since the 1930s. But he said credit markets would take time to unfreeze and that slowing consumer and business spending, along with a softening labor market, pointed to shaky economic activity.

U.S. economic data released before Bernanke spoke confirmed his outlook and the fears of investors.

U.S. retailers posted their biggest monthly sales decline in more than three years in September, while a gauge of New York manufacturing fell in October to the lowest since its inception in 2001.

Shares of big U.S. retailers were bruised by the data, with Dow components Wal-Mart Stores (WMT.N), the world's largest retailer, down 4.6 percent, and Home Depot (HD.N) slipping 3.4 percent.

Before 1 p.m., the Dow Jones industrial average .DJI was down 288.48 points, or 3.10 percent, at 9,022.51. The Standard & Poor's 500 Index .SPX was down 39.53 points, or 3.96 percent, at 958.48. The Nasdaq Composite Index .IXIC was down 58.89 points, or 3.31 percent, at 1,720.12.

Exxon Mobil (XOM.N) was among the biggest drags on the Dow, falling 7.6 percent as crude prices fell more than $3 on fears of slower economic growth. Economic bellwether Caterpillar Inc (CAT.N) gave up 7.5 percent.

"It looks like everything that's economically sensitive is getting hit pretty good," said Scott Vergin, a portfolio manager at Thrivent Financial in Minneapolis.

"The thing is how much has the credit crunch already impacted the real economy?" Vergin said. "That's what everyone's really worried about."

The FTSEurofirst 300 .FTEU3 index of top European shares closed 6.5 percent lower at 903.67 points.

Britain's FTSE 100 .FTSE fell 7.1 percent, Germany's DAX .GDAXI slipped 7.1 percent and France's CAC 40 .FCHI shed 7.2 percent.

Investors dumped mining shares, with the DJ Stoxx basic resources index .SXPP plummeting 16 percent, tracking a sharp sell-off in commodity prices on recession concerns.

"It's the beginning of the end of the financial crisis, but beyond that a global recession is looming," said Emmanuel Morano, head of equity management at La Francaise des Placements, in Paris.

"Fears over a global recession are justified, and these fears have been priced in very quickly. Valuations in the basic resources sector are apocalyptic. This sell-off really has the violence of the crash of 1987."

Oil prices fell to their lowest level in 13 months, dragged down by expectations that economic weakness will cut further into demand for crude.

Analysts have scaled back global demand growth estimates, with the Organization of the Petroleum Exporting Countries cutting its forecasts for world demand for crude next year in its latest monthly report. [nWLB2749]

"Even if governments are successful in calming equity markets and unfreezing credit markets in the near future, the fallout on the real economy from financial market headwinds is expected to be considerable," OPEC said.

U.S crude CLc1 was down $2.85 a barrel at $75.78 after touching a session low of $74.97, its lowest since September 2007. London Brent crude LCOc1 was $3.05 down at $71.48 a barrel.

In the Treasury bond market, most U.S. government debt prices rose on a renewed safety bid, but longer maturity bond prices fell as investors worried anew about the huge slew of debt issuance that looms to pay for the U.S. government's measures to rescue the financial system.

The benchmark 10-year U.S. Treasury note US10YT=RR rose 4/32 in price to yield 4.07 percent. The 2-year U.S. Treasury note US2YT=RR rose 5/32 in price to yield 1.75 percent.

The dollar rose against major currencies, with the U.S. Dollar Index .DXY up 0.54 percent at 82.02. Against the yen, the dollar JPY= fell 0.61 percent at 101.56.

The euro EUR= fell 0.65 percent at $1.3533.

Spot gold prices XAU= rose $8.40 to $843.65 an ounce.

The gloomy economic news and rise in risk aversion came despite trillions of dollars pledged worldwide to recapitalize banks and stem the worst financial crisis since the 1930s.

There were glimpses the concerted government efforts already were taking effect. The rate banks charge each other for dollar, euro and sterling loans fell for the second straight day as recent bold steps from authorities around the world continued to thaw out frozen money markets.

"Following the release of national 'bailout' plans from UK, Germany, France, U.S. and others, there are early signs that the severe money-market tension of the last month may be easing," said Meyrick Chapman, a strategist at UBS.

"We think the easing will continue," Chapman said. (Reporting by Ellis Mnyandu, Ellen Freilich, Steven C. Johnson in New York and Jamie McGeever, Ikuko Kao and Jan Harvey in London and Tyler Sitte in Frankfurt, Writing by Herbert Lash; Editing by Leslie Adler)