Growth fears depress Wall Street

US stocks received another bruising on Wednesday, ahead of Thanksgiving, amid escalating worries over the economy and the financial services sector.

In overnight trade, crude oil hit a record of $99.29 a barrel, while the yield on the 10-year Treasury note fell below 4 per cent and the dollar set new lows as risk aversion reached new highs.

Less than an hour after the opening bell the S&P500 was down 0.9 per cent at 1427.01, the Dow Jones Industrial Average slipped 0.9 per cent to 12897.64, and the Nasdaq Composite also shed 0.9 per cent to 2572.44.

The Dow is trading only 50 points higher than its mid-August low, an important technical indicator for traders. Meanwhile the S&P500 is trading only 0.6 per cent higher for the year.

Financials remained the major talking point for equity investors. Freddie Mac, the government sponsored mortgage agency was down 3 per cent at $25.94 having plummeted 28.7 per cent the previous day.

Analysts cut their price targets on the stock after it reported a $2bn loss and said it was “seriously considering” slashing its dividend by half.

“We believe that the U.S. housing market could get worse, with over 10 percent national house price declines, and we would not be surprised if Freddie’s credit losses are higher than its guidance,” Paul Miller, analyst at Friedman, Billings, Ramsey, said.

Fellow mortgage agency Fannie Mae shed 0.9 per cent and is now down 52.8 per cent this year.

The S&P financials index was trading 1.8 per cent lower at 383.82.

Worries over the solvency of Countrywide triggered a sharp decline in its share price on Tuesday and big rise in the cost of credit insurance against default.

However, the mortgage lender said persistent rumours that it could go bankrupt were “absolutely false” and it closed only modestly lower. However on Wednesday, the stocks was down 9.6 per cent at $9.29.

Worries about the outlook for the US economy were crystallised late on Tuesday, when the Federal Reserve said it expected growth of between 1.8 per cent to 2.5 per cent in 2008. This is down from a forecast made in June that the economy would expand by 2.5 per cent to 2.75 per cent.

Investors are concerned that the economy’s rate of growth could fall below the Fed’s new forecasts. Concerns revolve around the ability of debt laden consumers dealing with record high energy costs and deteriorating housing prices as banks pull back on their lending amid the ongoing credit squeeze

‘’The Fed, in our opinion, still does not grasp the severity of the real estate deflation and credit contraction that is underway, and, we believe, very likely trigger the first consumer recession since 1991,’’ said David Rosenberg, chief US economist at Merrill Lynch.

In earnings news, Deere & Co said fiscal fourth-quarter profit rose 52 per cent amid solid sales of agricultural and commercial equipment. However the shares slipped 0.5 per cent to $144.32.

Abercrombie & Fitch, the retailer posted a 15 per cent rise in third quarter profit, but said comparable-store sales were nearly flat. The shares rose 1.5 per cent to $73.90.

In economic news, weekly jobless claims data revealed a slight fall in the number of people filing for the first time for unemployment benefit.

The US Department of Labor reported 330,000 new claims last week, a decline of 11,000 from the previous week’s revised figure, in line with expectations.

Meanwhile consumer sentiment as measured by the Reuters/University of Michigan index rose to 76.1 in late November, from 75.0 earlier in the month. Economists had expected an unchanged reading.

A weak outlook for stocks encouraged overnight flight to quality buying of government bonds, and the yen rose sharply as carry trades were liquidated.

The yield on the US two-year Treasury note was 16 basis points lower at 3.04 per cent, while the 10-year Treasury note was 8bp lower and yielding 4.02 per cent, having earlier fallen below 4 per cent.

The dollar fell to a two-year low versus the yen in overnight trade as it broke below Y109 and set a new record low of $1.4855 against the euro.

Early in New York, the dollar was down 1.3 per cent at Y108.51 but rose fractionally against the euro at $1.4831. US crude prices were down 15 cents at $97.84 a barrel.

Tension in the money market remained on Wednesday as two- and three-month Libor edged further above the 5 per cent level they broke on Tuesday.

Rates have risen from around 4.88 per cent in the past week as traders focus on year end funding pressures at the banks.

Swap rates that compare expectations of Libor versus the effective Fed funds over the next three months have also been rising, although they are yet to test the highs seen in August.

Meanwhile, a major barometer of banking stress are swap spreads, which measure the difference between money market and Treasury collateral. The two-year spread traded at a record high of 101.5 basis points on Tuesday, and was at 104bp early on Wednesday. The 10-year swap spread was at 84.5bp on Wednesday and had surpassed the peak of 83.75bp reached in mid-August.

Minutes from the Federal Reserve Open Market Committee’s October meeting, released in mid-afternoon on Tuesday, provided little encouragement to traders betting on future rate cuts, referring to last month’s decision to ease as a “close call”.

But some analysts believe the FOMC has taken a flexible approach on policy.

‘’The FOMC minutes showed a Fed leaving the door open for more easing, as the central tendency for growth in 2008 is 1.8 to 2.5 per cent, below capacity,’’ said TJ Marta, strategist at RBC Capital Markets. ‘’The central tendency for core Personal Consumption Expenditure inflation is 1.7 to1.9 per cent contained within the 1 to 2 per cent unofficial comfort zone.’’

European stocks were weaker as Wall Street opened. The FTSE Eurofirst 300 index was down 2.1 per cent while in London the FTSE 100 index was off 1.8 per cent. Asian equity markets closed lower, led by a 4.2 per cent slide in Hong Kong, while Japan’s Nikkei 225 index fell 2.5 per cent.