* MSCI world equity index down 0.07 percent at 361.73
* Goldman cuts U.S. brokers, adds Citi, GM to sell list
* Euro hits record high vs yen before next week's ECB
* Dollar falls back again after Fed
By Natsuko Waki
LONDON, June 26 (Reuters) - World stocks slipped on Thursday
as Goldman Sach's downgrade of U.S. brokerages overshadowed the
Federal Reserve's decision to leave interest rates steady, while
the euro rallied on expectations for a rate hike next week.
Interest rate futures moved to show investors are scaling
back expectations for a U.S. interest rate rise in August as the
Fed, having left the cost of borrowing unchanged as expected on
Wednesday, gave no hint of an imminent rate hike.
A modest rise on Wall Street and in Asia failed to follow
through in Europe where investors sold bank shares after Goldman
cut its view on U.S. brokers to "neutral" from "attractive" and
added Citigroup <C.N> to its Conviction Sell List, forecasting
$9 billion of writedowns in the second quarter.
Goldman's move highlights investor jitters over the
financial sector which is still in the process of coping with
the credit crisis and raising fresh capital.
"The Fed decision was not a surprise, and anyone can read
what he wants into the Fed's statement," said Thierry Lacraz,
strategist at Swiss bank Pictet.
"The move today is driven by the fact that people are
realising banks need more and more capital, and by the fact that
Goldman has added Citi to its sell list."
The FTSEurofirst 300 index <> fell 1.4 percent while
MSCI main world equity index <.MIWD00000PUS> slipped almost 0.1
percent. Banking shares were down 3.4 percent in Europe <.SX7P>.
U.S. stock futures <SPc1> were down around 0.4 percent,
pointing to a weaker start on Wall Street. Goldman also put
General Motors <GM.N> on its sell list, triggering a sell-off.
FED 0, TRICHET 1?
The dollar hit a two-week low against a basket of major
currencies <.DXY> after the Fed undercut expectations for
tightening. Interest rate futures now price in less than a 25
percent chance of a rate hike by end-August.
"The Fed is showing the markets that it has a large monetary
policy stick with which to beat inflation expectations but that
it is not yet ready to use it," said Nick Parsons, head of
market strategy at nabCapital.
"It is difficult to see how it can raise rates now with
rising unemployment and tumbling consumer confidence without
provoking another lurch down in the U.S. economy. Just as in
June last year, the Fed is now a bystander to unfolding domestic
economic events."
The euro gained a quarter percent to $1.5706 <EUR=>, while
it rose as high as 169.45 yen <EURJPY=> ahead of next week's
European Central Bank monetary policy meeting where the cost of
borrowing is set to rise to 4.25 percent.
The euro has been outperforming in recent sessions as
European Central Bank President Jean-Claude Trichet warned of
higher inflation and cemented speculation for a July rate hike.
"(We) expect the ECB to hike in July and then remain on hold
for the rest of the year, but these comments raise the risk that
the ECB may have to tighten rates further in line with market
expectations," JP Morgan said in a note to clients.
Emerging sovereign spreads <11EMJ> tightened 1 basis point
while emerging stocks <.MSCIEF> were steady on the day.
The September Bund future <FGBLU8> erased early gains to
stand up 3 ticks.
U.S. light crude <CLc1> rose 0.3 percent to $135.04 a barrel
having fallen earlier after a surprise rise in crude stocks.
Gold <XAU=> rose to $891.60 an ounce.
(Additional reporting by Blaise Robinson)
