Stocks turn south on Fed-induced slowdown fears, dollar gains



* Graphic: Global asset performance Link

* Graphic: World FX rates Link

By Herbert Lash

NEW YORK, May 20 (Reuters) - The S&P 500 neared bear market territory and the dollar strengthened on Friday as investor unease about Federal Reserve policy tightening to clamp down on inflation kindled fears of a recession.

Shares had rebounded earlier in Europe and Asia after China cut a key lending benchmark to bolster its weakening economy, helping initially to drive gains on Wall Street.

China cut its prime rate for five-year loans, which influences mortgage prices, by 15 basis points in a reduction that was sharper than expected as authorities seek to cushion the impact of an economic slowdown.

The benchmark S&P 500 .SPX slid below 3837.248, or 20% lower than its Jan. 3 record closing high, in a decline that would confirm a bear market if the index closes below that level.

How long the downdraft in equities lasts will depend on when inflation breaks, said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.

"What really flummoxed investors this week, myself included, is when you have the types of companies that typically do well in economic softness, do terribly," Tuz said, referring to poor earnings results at Walmart Inc WMT.N and Target Corp TGT.N .

The S&P 500 .SPX lost 1.80%, the Dow Jones Industrial Average .DJI fell 1.49% and the Nasdaq Composite .IXIC dropped 2.54%.

Equity valuations need to come down and the expected return on investments, the discount rate, needs to go up, said Stephen Auth, chief investment officer of equities at Federated Hermes.

"The market is starting to digest the idea that this might be a new world where the discount rate on risk assets is not zero anymore," Auth said.

"You're seeing all these different areas of the market get pounded at the same time and it's just been very unsettling for investors," he added.

MSCI's gauge of stocks in 47 countries .MIWD00000PUS shed 0.82%, on track on track for its seventh consecutive weekly decline, its longest losing streak since the index was launched in 1990.

Earlier, the pan-European STOXX 600 index .STOXX closed up 0.73%.

U.S. Treasury yields fell for a third straight session on concerns about growth prospects. The yield on benchmark 10-year notes US10YT=RR fell 7.8 basis points to 2.778%.

Fed funds futures were firmer, suggesting that the U.S. rate market has pulled back a bit from some of its more extreme rate hike estimates. The rates market has priced in a fed funds rate of 2.783% at the end of next year, compared with a current level of 0.83%. The rate was as high as 2.9% two weeks ago.

The dollar recouped some of its recent losses against the euro but remained on pace for its worst weekly decline against the common currency since early February as investors questioned whether the greenback's month-long rally was done.

The dollar has been supported in recent months by a flight to safety amid a rout across markets due to fears of soaring inflation, a hawkish Fed and the war in Ukraine.

The dollar index =USD rose 0.223%, with the euro EUR= down 0.4% to $1.0544. The Japanese yen strengthened 0.01% to 127.76 per dollar.

Euro zone bond yields were higher after two days of hefty falls as risk sentiment improved following China's rate cut.

Germany's 10-year government bond yield fell 1.2 basis points to 0.932%, well below last week's eight-year high of 1.189%.

Markets are pricing in 38 basis points of tightening from the European Central Bank by its July meeting ECBWATCH . This suggests a 25 basis point hike is fully priced in and markets see around a 50/50 chance of an additional 25 basis point move.

Oil prices steadied, on course for little change for the week as a planned European Union ban on Russian oil balanced concerns that slowing economic growth will hurt demand.

U.S. crude futures CLc1 settled $1.02 higher at $113.23 and Brent LCOc1 rose 51 cents to settle at $112.55 a barrel.

Gold edged up, heading for its first week of gains in five on persistent worries over economic growth and the dollar's decline over the week.

Falling Treasury yields supported the safe-haven metal on the day, sending spot gold XAU= up 0.1% to $1,843.29 per ounce by 1802 GMT. Prices hit a one-week high earlier in the session.

U.S. gold futures GCv1 settled up 0.1% at $1,842.10.

Bitcoin BTC=BTSP fell 4.16% to $29,029.40.



Global FX performance Link
Global asset performance Link
World stocks plunge $13 trillion in value Link



Reporting by Herbert Lash, reporting by Samuel Indyk in London
and Andrew Galbraith in Shanghai; editing by Hugh Lawson,
Kirsten Donovan



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