Bonds, Swiss franc rise on recession jitters

NEW YORK Thu Sep 1, 2011 5:12pm EDT

A trader reacts at his desk in front of the DAX board at the Frankfurt stock exchange August 26, 2011. REUTERS/Alex Domanski

A trader reacts at his desk in front of the DAX board at the Frankfurt stock exchange August 26, 2011.

Credit: Reuters/Alex Domanski

NEW YORK (Reuters) - Government debt and the Swiss franc gained on Thursday after slowing factory output around the world renewed worries that the global economy is on the brink of recession, sparking a rally in safe-haven assets.

Stocks on Wall Street and in Europe initially rose after data on U.S. factory activity in August unexpectedly showed expansion, though it was hardly robust. But Wall Street later fell 1 percent in light volume, with investors mostly biding their time ahead of Friday's U.S. jobs data for August.

Adding to concerns of a deteriorating labor market, Goldman Sachs said in a note to clients that its economists cut their forecast for a gain in nonfarm payrolls to 25,000 from 50,000.

The franc rallied across the board and the euro dropped broadly as the better-than-expected U.S. manufacturing data did little to allay concerns about global economic deterioration.

The euro was last down 2.3 percent at 1.1331 francs and the dollar was 1.5 percent lower at 0.7942 franc.

U.S. government debt rallied as the data stoked fears of a dismal payrolls report on Friday and bets the Federal Reserve will introduce more stimulus to avert a new recession.

The benchmark 10-year U.S. Treasury note jumped 28/32 in price to yield 2.14 percent. In Europe, 10-year yields on German bunds fell to 2.12 percent, within 10 basis points of the record lows they hit last month.

There was little sign that investor demand for debt and other safe-havens was slowing.

"At the end of the day, this does not remove the need for more stimulus from the Fed," Kathy Lien, director of research at GFT Forex in New York, said of the data. "The key is still job growth."

Weakness in factory activity extended to Germany, the euro zone's biggest economy, where manufacturing grew in August at its slowest pace in almost two years.

On Wall Street, the Dow Jones industrial average .DJI closed down 119.96 points, or 1.03 percent, at 11,493.57. The Standard & Poor's 500 Index .SPX slid 14.47 points, or 1.19 percent, to 1,204.42. The Nasdaq Composite Index .IXIC lost 33.42 points, or 1.30 percent, at 2,546.04.

Stocks on other world exchanges, including those in Europe, rebounded, mostly recovering early losses.

European stocks were helped by gains in defensive sectors such as telecommunications and pharmaceuticals, which eclipsed losses in cyclical shares. Peripheral banking shares took a hit though. The FTSEurofirst 300 index .FTEU3 rose 0.7 percent after dropping as much as half a percent earlier.

Global stocks, measured by the MSCI all-country world equity index .MIWD00000PUS, lost 0.5 percent.

Oil prices in London fell on concerns about the economy, while U.S. crude rose slightly as a brewing storm in the Gulf of Mexico forced production cuts.

Front-month Brent settled down 56 cents to $114.29 a barrel. U.S. crude rose 12 cents to settle at $88.93 a barrel.

"The stock market is lower and helping to pull U.S. crude back and the weak German and French data weighed on Brent," said Dan Flynn, analyst at PFGBest Research in Chicago.

Spot gold prices rose $1.90 to $1,825.20 an ounce.

(Reporting by Julie Haviv, Richard Leong, Ryan Vlastelica, Edward McAllister and Gene Ramos; Writing by Herbert Lash; Editing by Dan Grebler)

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