Stocks grow cautious after rally

Stock markets performed poorly in the first three months of 2008

US stocks lost ground on Wednesday as Federal Reserve Chairman Ben Bernanke said it was possible the US economy could enter recession.

Testifying before a congressional committee, Bernanke said the US economy would not grow much in the first half of 2008 and could actually contract.

The Dow Jones average fell 0.31%, or 38.84 points, to 12,615.52.

European stocks clung on to gains, inspired by investor hopes that the worst of the credit crisis may be over.

Strong demand for a Lehman Brothers share offering, despite fears it could face similar problems to troubled rival Bear Stearns, has boosted confidence.

In Europe, the Paris Cac was up 0.82% and the Frankfurt Dax gained 0.9%. London's FTSE 100 rose 0.69%.

"There is growing talk that the worst might be over, both for equities and the dollar," said Julian Jessop Chief International Economist.

"But while prompt action by the Fed and [some] other central banks may have averted the imminent threat of a financial meltdown, substantial risks still hang over the US and other major economies."

Asian stocks had rallied earlier in the day.

Hong Kong's Hang Seng index closed up 3.2% and Japan's Nikkei 225 index hit a one-month high after strong overnight gains on Wall Street.

'Concerns easing gradually'

Earlier this week, US investment bank Lehman Brothers and Switzerland's UBS both announced new share issues to repair their balance sheets, with both actions being well received by markets.

UBS also announced a loss of $39bn on sub-prime writedowns, and its chief executive resigned.

"Worries about the global credit market and the health of the US economy had been stifling investors," said Kim Sung-Bong, an analyst at Samsung Securities in Seoul.

"Now that those concerns are easing gradually, the market is staging a relief rally, which is quite natural."

Broad rally

The rally which began on Wall Street continued in Asia overnight.

On Tuesday, the Dow Jones in New York closed up 3.2% or 391.5 points at 12,654.4.

In Tokyo, the Nikkei 225 index ended up 4.2% at 13,189.36. Hong Kong's Hang Seng Index climbed 3.2% to 23,872.43.

The Shanghai Composite Index climbed more than 3% and stock indexes in Australia, the Philippines, Singapore, South Korea and Taiwan all gained more than 2%.