Fear rules markets as Dow falls 316

Global Market

Federal Reserve Bank of Chicago President Charles Evans said officials can make clear their commitment to stable prices by ``promptly'' reversing interest- rate cuts when ``insurance'' against growth risks is no longer needed.
Evans' comments reflect the assessment of some officials at the Jan. 29-30 meeting that once the economy recovers, the Fed may need to raise rates at a ``rapid'' pace, according to minutes of the gathering. They follow expressions of concern by lawmakers this week to Fed Chairman Ben S. Bernanke that lower rates may start stoking inflation.
Focusing on the Fed's congressional mandate for stable prices and maximum employment will ``minimize the potential for problems.
In times of financial disruptions, there may be risks of substantial spillovers that could lead to persistent declines in credit intermediation capacity or large declines in wealth.
Policy `Insurance'
In such cases, policy may take out insurance against these adverse risks and move the policy rate more than the usual prescriptions.
Evans, 50, the newest Fed bank president and the Chicago Fed's former research director, didn't make a direct reference to the current economic or interest-rate outlook.
Evans said signs of too much risk taking may include ``imbalances'' that put the Fed's policy goals at risk. He cited stock-market gains in the late 1990s that threatened to spur inflation. The Fed probably can't identify or try to prick asset bubbles, Evans said, echoing prevailing views at the U.S. central bank.
Other Fed officials spoke at the conference earlier today. Boston Fed President Eric Rosengren said lowering interest rates can ``significantly'' aid the housing market, though it isn't a cure-all.
Fed Governor Frederic Mishkin said he's ``suspicious'' of one study's estimates on the potential damage to economic growth from mortgage-credit losses.

Currencies

The dollar fell to the lowest level in three years versus the yen and touched the weakest ever against the euro after the Federal Reserve signaled the currency's decline may be helping the U.S. economy.
The U.S. currency dropped below 104 yen, to its cheapest level since March 2005, as a report showed Chicago-area business shrank this month, fueling bets on a bigger Fed interest-rate cut in March. Fed Chairman Ben S. Bernanke said yesterday the depreciating currency helps cut the trade deficit.
The dollar fell as low as 103.69 yen, then settled at 103.74 yen. Against euro, It touched $1.5239 per euro, then traded at $1.5179. Some analyst said that dollar will weaken to $1.55 in coming weeks.
Fed's `Indifference'
The U.S. currency's decline has made U.S. goods cheaper abroad, boosting exports to a record and shrinking the nation's trade deficit last year for the first time since 2001. It can also make it less attractive to hold onto U.S. assets. Foreign holdings of U.S. stocks, notes and bonds rose a net $56.5 billion in December, slowing from an increase of $90.9 billion in November, Treasury Department data showed this month.
Bernanke also said a housing slump may cause smaller U.S. banks to fail and increase unemployment, fueling speculation Fed policy makers will increase the pace of interest-rate cuts.
Chicago Report
U.S. business barometer dropped to 44.5 in February, the lowest since December 2001, from 51.5 a month earlier. Figures less than 50 signal a contraction.
The slump in the U.S. currency helped push the price of oil to a record of $103.05 and gold to an all-time high of $978.50 an ounce in London.
The U.S. Dollar Index traded on ICE Futures in New York, which tracks the currency against six major counterparts, declined to 73.56 today, the lowest since 1973.
Volatility Jumps
Japan's currency climbed 3.4 percent to 96.56 per Australia's dollar, 3.4 percent to 82.99 per New Zealand dollar and 4.9 percent to 13.26 per South Africa's rand.
The currencies are favorites for so-called carry trades, in which investors get funds in a nation with low borrowing costs and invest in one with higher rates. The risk in that strategy is that swings in exchange rates erase those profits.
Implied volatility on one-month dollar-yen options touched 14.1 percent, the highest since January, from 11.48 percent yesterday. Traders quote volatility, a gauge of expectations for currency moves, as part of pricing options. Japan's 0.5 percent benchmark rate compares with 7 percent in Australia, 8.25 percent in New Zealand and 11 percent in South Africa.
After trading between $1.43 to $1.49 per euro since November, the dollar decline gained momentum when Fed Vice Chairman Donald Kohn said on Feb. 26 that credit-market turmoil posed a ``greater threat'' than inflation. The comments drove the euro above $1.50 for the first time. The dollar fell past $1.51 on Feb. 27 after Bernanke told a House panel policy makers ``will act in a timely manner'' to support growth.
The euro also got a boost yesterday after European Central Bank President Jean-Claude Trichet said ``price stability is a necessary condition'' for ongoing economic expansion. The ECB next meets on March 6 to set its key rate, now at 4 percent.

Stock Market

Fear rules markets as Dow falls 316
All three major indexes suffer their fourth monthly losses in a row, something last seen in 2002. Investors will spend the weekend wondering whether to nibble at stocks or wait until the turmoil subsides.
Stock suffered their worst one-day losses in more than three weeks on weakness in financial stocks, worries about the economy and the prospect of higher oil prices.
The Dow Jones industrials fell about 316 points, or 2.5%, to 12,266. The Standard & Poor's 500 Index fell 37 points, or 2.7%, to 1,331, and the Nasdaq Composite Index was off 60 points, or 2.6%, to 2,271.
All three indexes ended February with their fourth consecutive monthly losses, something last seen when the market was plunging in the summer and early fall of 2002.
The stock market has now opened the year with two months of losses. History suggests that it will be a bit of a miracle if the market ends 2008 with a gain.
While today's selling was very broad, it didn't mean that selling pressure was going to end any time soon. Market bears believe stocks are headed lower. And many bulls may spend the weekend wondering how to deal with the markets next week.
The sell-off wasn't limited to stocks. There was also a bout of selling in the municipal bond market on reports that several hedge funds were forced to sell assets to meet margin calls. As a result, there was heavy buying of short-term Treasury securities, and interest rates moved lower overall.
Four issues investors will be thinking about
Many investors may well give up the ghost and decide to wait on the sidelines until the market turmoil eases.
It's a rational way to look at the market, which faces a number of problems going forward, including:

• Lack of confidence. The U.S. financial markets have been buffeted by a number of problems, including a badly slumping housing market, the inability to quantify the losses that financial institutions from banks to insurance companies face from the housing problem, a softening economy overall and resurgent inflation.
• How badly higher oil prices will hit the economy. Crude oil finished the week with a 3.1% gain and ended February up 11% from January. AAA's daily survey of retail gasoline prices showed regular unleaded averaging $3.164 a gallon, up slightly from Thursday and up 31% from a year ago. The rapid run-up will eat into the tax rebate the government plans to send out this spring.
• Softening employment. The national unemployment rate has been rising, and job growth has slowed in recent months. The government will report on payrolls next Friday, and markets will focus on that report intensely.
• Tech weakness. While news reports have emphasized the problems in financial stocks, technology shares have suffered the most since the end of 2007. The big question is whether the market can rebound without tech.

A really weak market
None of the 30 Dow stocks were showing gains Friday. Only 15 S&P 500 stocks were higher, along with just six stocks in the Nasdaq-100 Index. The index finished down 49 points or 2.7% to 1,745.
The Dow finished the week down just under 1%. The Dow had climbed for four consecutive days only to drop 112 points on Thursday. The S&P 500 fell 1.7% for the week, and the Nasdaq had a 1.4% loss.
February proved a loser for the major indexes, with the Dow down 3%, the S&P 500 down 3.5% and the Nasdaq off 5%.
Consumer spending disappoints
U.S. consumer spending rose 0.4% in January slightly better than what economists had expected and a slight rise from the 0.3% increase in December -- but inflation worries dampened the news.
Adjusted for inflation, consumer spending was unchanged from December. That gave investors more reason to worry about an economic slowdown, because consumer spending makes up about two-thirds of the U.S. economy. Incomes rose 0.3% in January, following a 0.5% rise in December.
The consumer sees bad news on every front and is pulling back, although people were spending more, it was going into higher costs for food and fuel, and they weren't buying more stuff.
The personal consumption expenditures index, or PCE, rose 0.4% in January -- but the "core PCE number, which excludes food and energy prices, was up 2.2%, slightly above the Federal Reserve's "comfort zone" of 1% to 2%.

Commodities

Oil
Oil set successive record highs the past four days as a weakening dollar triggered commodity investments priced in the U.S. currency. The dollar declined to a record $1.5239 per euro earlier today, before rebounding to $1.5195.
Oil rose to a record $103.05 a barrel earlier today, the highest since the contract was introduced in 1983. Prices rose 3.1 percent this week and are up 65 percent from a year ago.
Turkish Withdrawal
Turkey's army said it withdrew troops from northern Iraq after the biggest military incursion into the country in 11 years. Turkish units pulled out today after more than a week of battles with the Kurdistan Workers' Party, or PKK, the army said in a statement. Iraq holds the world's third-biggest reserves.
OPEC Meeting
The Organization of Petroleum Exporting Countries may decide to maintain supply at a meeting March 5, ignoring a U.S. call for more production, a Libyan official said yesterday. Nigeria may oppose a cut in oil production because of rising prices, the country's oil minister Odein Ajumogobia said today.