* MSCI world equity index down 1.7 percent at 303.05
* Interbank money markets freezing up with soaring rates
* Fed rate verdict, fate of AIG/other fin firms in focus
By Natsuko Waki
LONDON, Sept 16 (Reuters) - Investors dumped equities, oil
and emerging market assets on Tuesday, unleashing a panic rush
to secure short-term cash as the financial turmoil escalated a
day after Lehman Brothers collapsed.
A global exodus from risky assets extended into a second day
after Lehman filed for bankruptcy protection and Bank of America
<BAC.N> agreed to buy Merrill Lynch <MER.N> on Monday. The
low-yielding yen rallied and safe-haven government bonds surged,
sending the 30-year U.S. Treasury yield below 4 percent for the
first time since the early 1960s.
Acute stress was building up in the interbank money markets,
where the cost of borrowing dollars overnight shot up to more
than three times the benchmark U.S. interest rate of 2 percent.
Liquidity injections from Asian and European central banks,
to the tune of billions of dollars, did little to calm
investors' nerves in a market where world stocks hit their
lowest level since December 2005.
An interest rate decision by the U.S. Federal Reserve <ECON>
tops the day's agenda after investment bank Goldman Sachs <GS.N>
reported a 70 percent decline in third quarter profits and
concerns grew about the state of American International Group
<AIG.N>.
Interest rate futures <FEDWATCH> fully priced in a chance
that the Fed would cut rates to 1.75 percent later, with some
analysts talking about a bigger half percentage point reduction.
"The market seems to be fairly convinced ... that the Fed
will offer some form of monetary stimulus," said Andre de Silva,
global deputy head of bond strategy at HSBC.
"The minimum the market is looking for is some sort of
response to see whether that helps but the biggest risk now is
not only financial market conditions -- we've had this market
stress for over a year now -- but (also it) is more about what
this translates into in terms of economic risk."
The MSCI main world equity index <.MIWD00000PUS> fell 1.7
percent, its lowest since December 2005, after a 3.6 percent
tumble on Monday. In September alone the index has so far lost
more than 10 percent of its value and is on track for the worst
monthly performance since September 2002.
The FTSEurofirst 300 index <> fell 3.3 percent while
Asian stocks <.MIAPJ0000PUS> fell more than 4 percent.
AIG, thrown a $20 billion lifeline by New York state, came
under renewed pressure as ratings agencies downgraded the
insurer's debt.
U.S. stock futures were down as much as 1.7 percent <SPc2>
after Wall Street suffered on Monday its worst performance since
markets reopened after the Sept. 11 attacks.
PANIC SCRAMBLE IN MONEY MARKET
There were signs that the financial crisis is freezing
activity in the interbank money market. At one stage overnight
dollar deposit rates <USDOND=> rose to 11.6 percent, according
to Reuters data. In the London interbank market <LIBOR>,
overnight dollar rates were fixed at 6.4375 percent.
"The banking crisis is not over and we have potentially a
difficult few months to get through right to the end of this
year," said Padhraic Garvey, head of investment grade strategy
at ING. "The issue is that providing liquidity is one obvious
solution but the reality is that the banking sector is not going
to be happy till they have really sorted out the problem areas
out there."
The low-yielding yen extended its steep rise, with the
currency hitting a four-month high of 103.62 per dollar <JPY=>.
On Monday, the dollar suffered its biggest one-day drop against
the yen in nine years.
The yen hit a two-year high of 147.19 per euro <EURJPY=>
while the dollar <.DXY> fell against a basket of major
currencies.
Safe-haven government bonds surged around the world. U.S.
30-year Treasury yields hit 3.9547 percent <US30YT=RR> as prices
soared and the December bund future <FGBLc1> gained 105 ticks.
The broad sell-off in risky emerging assets, already under
pressure from slowing global growth, gained new momentum.
Emerging sovereign spreads <11EMJ> blew out to 410 basis points
over U.S. Treasuries, their widest level since October 2004.
Emerging stocks <.MSCIEF> fell 4 percent to their lowest
since October 2006.
U.S. light crude <CLc1> extended losses, falling 4 percent
to $91.81 a barrel as investors extended across-the-board
deleveraging, taking oil more than $50 off its record high set
in July. Gold <XAU=> fell to $781.00 an ounce.
(Additional reporting by Emelia Sithole; editing by David
Stamp)
