* U.S. stocks down with bond prices, dollar
* Sterling hits highest in year vs euro after UK data
* European shares, periphery bonds extend gains
* Dollar index steady on Fed taper prospects
* Australia inflation data hurts shares, lifts Aussie
By Barani Krishnan
NEW YORK (Frankfurt: HX6.F - news) , Jan 22 (Reuters) - U.S. stocks fell on Wednesdayas disappointing company earnings gave investors few reasons toextend last year's rally, while bond prices slipped with thedollar as markets took in their stride another possible cut inthe Federal Reserve stimulus.
European assets grabbed the spotlight, with sterling hittinga three-week high against the dollar and a one-year high againstthe euro on hints of an impending UK rate hike. European stocksextended gains on encouraging corporate results and a rally insouthern euro zone government bonds.
An upgrade of the International Monetary Fund's worldforecasts lifted sentiment in global equities, keeping worldstocks steady..
On Wall Street, the S&P 500 and Dow were down, while thetech-heavy Nasdaq rose.
"There has been little so far to excite the masses and it isgoing to lead many to question, can this market hang in therewith flat earnings environment?" said Andre Bakhos, managingdirector at Janlyn Capital LLC in Bernardsville, New Jersey.
IBM (NYSE: IBM - news) shares lost 3.3 percent to $182.24, becoming thebiggest drag on both the Dow and S&P 500 indexes. The world'slargest technology services company missed revenue expectationsfor a fourth straight quarter amid weakening demand,particularly in growth markets like China.
Coach Inc (NYSE: COH - news) tumbled 6 percent to $49.38, the worstperformer on the S&P 500. It said sales in North America fellfurther in the final quarter of 2013, as it lost share in thehandbag business to fast-growing rivals.
United Technologies Corp (NYSE: UTX - news) was up 0.9 percent at$116.01, offsetting some of the bearish sentiment. The world'slargest maker of elevators and air conditioners reported higherfourth-quarter profit that topped Wall Street estimates, despiterevenue that fell shy of expectations.
Norfolk Southern Corp jumped 6.4 percent to $94.39as one of the best performers on the S&P 500. The railroadposted a 24 percent rise in quarterly income that beat WallStreet expectations. The gains helped lift the Dow JonesTransportation average to a record high.
Those weren't enough to lift the broader market, though.
By 11:52 a.m. EST (Other OTC: ECPCY - news) (1652 GMT), the Dow Jones industrialaverage was down 59.85 points, or 0.36 percent, at16,354.59. The Standard & Poor's 500 Index was down 1.37points, or 0.07 percent, at 1,842.43. The Nasdaq Composite Index was up 9.97 points, or 0.24 percent, at 4,235.73.
"It will be easier to unnerve a market with less earningsconfidence, and you are seeing companies like IBM and Coach thathave come out and leave the investor looking for somethingsubstantial to bite into," said Janlyn Capital's Bakhos.
The dollar slipped against sterling and the Aussie dollarwhile it was little changed against a basket of currencies. Investors expect the Fed to make another $10 billion cutto its monthly bond-buying program of $75 billion. The centralbank's policy-setting committee will meet on Jan. 28-29.
The pound rallied after another sharper-than-expected fallin UK unemployment, to 7.1 percent, provided fresh proof of astrengthening economy and bolstered speculation that a Bank ofEngland rate increase may not be too far off.
Minutes from the BoE (Shenzhen: 000725.SZ - news) 's last meeting, released at the sametime as the data, showed policymakers now acknowledgedunemployment was likely to fall to the 7 percent threshold theyhave set for reviewing the bank's policy, "materially earlier"than expected.
The news sent sterling surging to its highest in a yearagainst the euro, up against the dollar whileUK government bonds, or gilts, lost out as investors sought outhigher-rewarding alternatives.
"It will certainly be the big challenge for Bank of Englandgovernor Mark Carney and the MPC (Monetary Policy Committee) inmanaging the forward guidance," said Michael Hewson, chiefstrategist at CMC Markets.
"What does he do when it does hit 7 percent? ... I think theonly way is up for the pound."
U.S. Treasuries prices fell and benchmark yields edged upfrom five-week lows, with prices dragged lower by weaker Germangovernment debt.
The benchmark 10-year U.S. Treasury note was down 7/32 toyield 2.849 percent. The 10-year yield hit 2.818percent on Friday, its lowest level since Dec. 11, according toReuters data.
World stocks were flat while European stocks rose for a second straight day.
Among commodities, oil climbed on expectations thataccelerating growth in industrialised economies would liftdemand. U.S. crude oil futures rose almost 2 percent to$96.77 a barrel, its highest since Jan. 2.
- USA News