Few places to hide as recession risks rise

By Daniel Bases

NEW YORK (Reuters) - Rising fears of slowing economic growth in the United States and Europe led to weak stock markets across the globe on Wednesday and punctured the rally in ballooning commodity prices also.

Bargain hunters bought the beaten-up financial sector stocks, which briefly helped lift benchmark U.S. indices into the plus column.

U.S. recession fears were stoked after the No. 3 U.S. bank, JP Morgan (JPM.N) said its quarterly profit fell more than expected due to risky mortgages while No. 1 computer chip maker Intel Corp (INTC.O) missed Wall Street estimates.

The poor results highlighted the strains in the consumer sector which drives the U.S. economy.

But investors scooped up JP Morgan's shares, as well as those of Wells Fargo & Co (WFC.N), the No. 2 U.S. mortgage lender, on a smaller-than-expected decline in profits.

"Financials are really starting to take off from here. A lot of people say the group has been washed out," said Anthony Conroy, head trader for BNY ConvergEx, an affiliate of the Bank of New York.

With recession fears rising, expectations for the U.S. Federal Reserve to cut interest rates by the end of the month are intensifying.

At the same time, the euro dropped sharply against the U.S. dollar after comments from a European Central Bank official called into question 2008 euro zone growth forecasts.

Euro zone benchmark bonds yields fell sharply as a result but U.S. Treasury yields edged up after U.S. consumer price data showed a modest 0.3 percent rise in December but the highest level of inflation for the year in 17 years.

The benchmark 10-year Bund EU10YT=RR was yielding 3.974 percent, its lowest since last March, while the U.S. benchmark 10-year notes US10YT=RR were trading around a yield of 3.73 percent, after falling as low as 3.62 percent, the lowest since July 2003.

Markets are now awaiting Federal Reserve Chairman Ben Bernanke's testimony on Thursday on the outlook for the U.S. economy before the House Budget Committee.

Economists polled by Reuters on Wednesday unanimously said they expected the Fed to lower the benchmark fed funds target rate by half a percentage point to 3.75 percent.

The data "underlines our view that we're on a razor's edge here, that we could be headed into recession," said Mike Schenk, senior economist with Credit Union National Association in Madison, Wisconsin.

Anecdotal evidence from the Fed's Beige Book report showed the U.S. economy continued to grow in the forth quarter but the pace of activity slackened amid subdued holiday spending and a weak housing sector.

The Dow Jones industrial average .DJI was down 34.63 points, or 0.28 percent, at 12,466.48. The Standard & Poor's 500 Index .SPX was down 7.85 points, or 0.57 percent, at 1,373.10.