Stocks still wilt, bonds climb despite Fed

U.S. and European stocks fell on Wednesday as persistent worries about a U.S. recession undid the boost that Tuesday's surprise Federal Reserve interest rate cut gave to global markets.

Safe-haven government bonds and the yen, which tend to rise as investors pare risky trades, gained ground. Commodities, including oil, sagged on nagging fears that slower global growth will hurt demand. The MSCI world equity index was down on the day and off 13.4 percent for the year, though just off a 15-month trough plumbed a day earlier.

"The market is pricing in a recession," said Brian Gendreau, investment strategist at ING Investment Management in New York. "And, of the earnings, the market is focusing on the bad news because it confirms the market's predisposition."

The Dow Jones industrial average and the Standard & Poor's 500 Index were down 0.3 percent while the Nasdaq Composite Index lost 0.8 percent. A weak profit outlook from iPod maker Apple Inc helped push the Nasdaq composite index across a bear market threshold in early trading. The Fed on Tuesday slashed its key federal funds rate by three-quarters of a percentage point -- the largest cut in more than 23 years -- to 3.5 percent a week ahead of its scheduled meeting, underscoring the risks facing the U.S. economy. Investors believe a lot more needs to be done by the U.S. central bank to shore up the U.S. economy, which some see on the brink of recession, hit by a slumping housing market and tight credit. Markets have priced in a further half-point rate cut at next week's Fed meeting.

After rising as much as 1.6 percent, the FTSEurofirst 300 index of top European shares reversed direction to be down 1.8 percent. Worries about profits and bad debt write-downs were taking a toll on banks such as Societe Generale. Asian markets did manage gains earlier in the global session, with Japan's benchmark Nikkei rising 2 percent -- but those gains did not flow through to Europe. Analysts said gains in Japan could have been due to the 16 percent decline in the Nikkei this year, which made the index more than due for a rebound. Commodities were vulnerable. Copper was down slightly on the London Metal Exchange, while U.S. crude fell more than a $1 to $87.82 a barrel. "The Fed's move implied that the problems in the system are much worse than we expected," said Eugen Weinberg at Commerzbank in Germany.

U.S. government bond prices extended gains after U.S. equity markets opened lower, accelerating the safe-haven bid for Treasuries. The benchmark 10-year Treasury note's price traded up for a yield of 3.37 percent down from 3.42 percent late on Tuesday. It was the first dip below 3.4 percent since mid-2003. The 10-year Bund yield slipped to 3.91 percent. Bond yields move inversely to prices. In the currency market, the dollar shed 0.8 percent against the yen to 105.59 on the day, while the euro slid 1.3 percent to 154.24 yen. Falling stock markets are typically seen as a sign that investors are wary of taking on too much risk.

In currency markets, this translates into selling higher-yielding units for low-yielding currencies like the yen.