Citigroup effect: Wall Street tumbles

Robert Rubin

New York (Reuters) - U.S. stocks wilted on Monday after Citigroup warned of billions of dollars in loan losses, reigniting fears about the health of financial firms and the broader U.S. economy.

The dollar slipped against the Japanese currency as investors abandoned risky trades financed with borrowed yen while oil prices fell on fears that a banking crisis would slow growth in the United States, the world's top energy consumer.

Government bond prices, though, gave up earlier gains to trade slightly lower on the day.

Citigroup's chairman and chief executive, Charles Prince, resigned on Sunday after the largest U.S. bank said it may write off up to $11 billion of subprime mortgage losses, on top of a $6.5 billion write-down last quarter.

The banking giant's nearly pristine credit rating was downgraded and shares tumbled 7 percent to a session low at $35.00, triggering fears of even more exposure among financial firms to toxic U.S. subprime mortgage loans.

"The problem is, investors don't know what else is out there," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

"Citibank says OK, it will write off between $8 billion and $11 billion, but maybe there's another $15 billion behind this. Every day it's a new issue. I wouldn't go near these banking stocks."

Near the close of the session, the three major U.S. stock indexes trimmed their earlier losses and the Dow briefly traded in positive territory.

The Dow Jones industrial average fell 51.70 points, or 0.38 percent, to end at 13,543.40. The Standard & Poor's 500 Index <.SPX> slipped 7.48 points, or 0.50 percent, to 1,502.17. The Nasdaq Composite Index <.IXIC> dropped 15.20 points, or 0.54 percent, to 2,795.18.

Citigroup was at $35.90, down 4.9 percent, on the New York Stock Exchange.

A report showing stronger-than-expected growth in the vast service sector last month briefly helped major stock indexes cut their losses, but the pressure from financial shares kept the market on the defensive.

Concerns about the banking sector and its exposure to U.S. subprime mortgage loans triggered a sell-off in risky assets, including stocks, in August and September and pushed up the cost of interbank borrowing sharply.

Citi's announcement suggested the worst was far from over, signaling a rough road ahead for the economy and perhaps more interest-rate cuts from the Federal Reserve.

TURNAROUND IN BONDS

That initially prompted dealers to nudge Treasury notes higher on the view that the Fed's pre-emptive rate cuts to date may not have been enough to ward off a wider downturn.

But traders took profits by late afternoon, nudging the two-year note 2/32 lower in price for a yield of 3.70 percent. The benchmark 10-year note was down 8/32 to yield 4.35 percent. Bond yields move inversely to price.

In the money market, interbank lending rates for two-month and three-month dollar deposits rose to 4.875 percent at their daily fixing. Both rates stood above implied Fed funds for the period -- indicating stress in the money market.

Interbank borrowing costs shot up in August and September following the fallout in U.S. subprime mortgages and the near closure of the short-term asset-backed commercial paper market.

In currencies, the dollar hit a one-week low of 114.03 yen before recovering some of those losses to trade at 114.38, still down 0.4 percent.

The euro was quoted at $1.4467, down 0.3 percent from $1.4507 late on Friday, but near last week's record high of $1.4528.

Emerging market stocks, as measured by MSCI, were down 1.7 percent, while emerging sovereign spreads tightened by 1 basis point.

In overseas stock trading, the FTSEurofirst 300 index <.FTEU3> of pan-European shares slipped 0.7 percent, or 10.65 points, to 1,549.22, its lowest close since Oct. 22.

In Tokyo, the benchmark Nikkei <.N225> fell 1.5 perent, or 248.56 points, to end at 16,268.92, its lowest close since Sept. 18.

OIL DROPS, GOLD CLIMBS

In the oil market, U.S. light crude for December delivery fell $1.95, or 2 percent, to settle at $93.98 per barrel on the New York Mercantile Exchange. Last week, it surged past $96 for the first time on concerns about the impact on U.S. economic growth from turmoil in the finance industry.

December gold on the COMEX division of the New York Mercantile Exchange hit a contract high of $814.20 an ounce, buoyed by flight-to-quality demand. COMEX December gold rose $2.30 to end at $810.80 an ounce.