By Ian Chua
LONDON, Jan 22 (Reuters) - Global stocks sank for a second
straight session on Tuesday, dragging down commodities to set
the scene for a woeful start on Wall Street as investors ditched
assets exposed to the risk of a global economic slowdown.
But market talk of emergency interest rate cuts by major
central banks, fuelled by mounting fears that a U.S. recession
will hit world economic growth, helped European equities pare
early heavy losses.
After falling as much as 4.4 percent, European stocks
<> recovered to be little changed by midday, while the yen
-- which tends to rise as investors unwind risky trades --
retreated from a 2-1/2 year peak versus the dollar <JPY=>.
"Central bank rate cuts are probably the only thing that
will temporarily give investors something to cheer about, at
least for a little while," said Anthony Muh, executive director
at AllianceTrust Asset Management.
Those rate cut hopes came too late for Asian stock markets,
which saw Japan's benchmark Nikkei <> drop 5.7 percent --
the worst one-day loss since the session after the Sept. 11,
2001 attacks on the United States.
MSCI's main world stock index <.MIWD00000PUS> slipped 1.3
percent, after falling more than 2 percent earlier to depths
last seen in October 2006 and extending Monday's 3.3 percent
fall. Last year's near 10 percent gain on the index was
completely wiped out late last week.
Many investors have anticipated a sharp correction after a
run-up in stocks in the second half of 2007 which occured
against a backdrop of a global credit crunch that forced
emergency action by the world's major central banks and saw
companies start to signal that profit growth was slowing.
"It's a belated realisation that notwithstanding the cuts in
interest rates by central banks around the globe, those cuts are
not enough and that the underlying fundamentals are still
deteriorating and will continue to deteriorate for the
foreseeable future," Muh added.
Risk aversion has grown in tandem with fears of a U.S.
recession and fallout from the credit crunch which saw U.S. bond
insurer Ambac <ABK.N> lose its vital triple-A credit rating from
Fitch Ratings on Friday, putting at risk billions of dollars of
corporate and municipal bonds covered by the company.
"The crisis among monoline bond insurers has been a trigger
for this selloff late last week," said Marie-Pierre Peillon,
head of equity and credit research at Groupama Asset Management,
in Paris.
"The market has suddenly realized that if they collapse and
the dam breaks, we will see more provisions and writedowns from
a number of banks," she said.
Banks around the world have announced billions of dollars of
losses linked to their exposure to deteriorating U.S. subprime
mortgages. Worries that subprime defaults will spark a recession
lie at the heart of concern about the global economy's health.
With slower global growth likely to sap appetite for raw
materials, copper <MCU3> futures were knocked to a three-week
low on the London Metal Exchange while U.S. crude <CLc1> oil
prices slid nearly $3 to below $88 a barrel.
In another sign of heightened risk aversion, European credit
indexes widened to record levels before easing back again.
The mostly "junk"-rated iTraxx Crossover index
<ITCRS5EA=GFI> was at 507 basis points according to Markit data,
17 basis points wider on the day -- indicating raised
expectations of debt defaults.
Signalling a sharp sell-off on Wall Street later, U.S. stock
index futures fell around 4 percent <SPc1><DJc1>. U.S. markets
were closed on Monday for a public holiday.
SAFE HAVENS
Flows to safe-haven government bonds slowed as stocks
recovered from early big falls. The benchmark U.S. 10-year yield
<US10YT=RR> rose above 3.5 percent, after earlier slipping below
that level to a 4-1/2 year low.
The 10-year Bund yield <EU10YT=RR> was edging towards 3.9
percent after having slid to 3.78 percent -- levels last seen in
late 2006.
Gyrations in the equity markets also left their mark on the
forex market, sending the Japanese yen sliding off a 2-1/2 year
high against the dollar <JPY=> and five-month peaks versus the
euro <EURJPY=>.
The dollar rose 0.4 percent to 106.42 yen <JPY=> on the day,
well off the low of 105.63 yen, while the euro advanced 0.8
percent to 154.29 yen <EURJPY=>, off the trough of 152.12.
"With so much flux in the global markets, further volatility
in currencies is almost inevitable," said James Hughes, market
analyst at CMC Markets.
