By Natsuko Waki
LONDON, Jan 18 (Reuters) - World stocks hit a five-month low
on Friday, prompting safe-haven flows into government bonds as a
U.S. financial rescue plan failed to erase fears that the
world's largest economy might already be in recession.
President George W. Bush told lawmakers on Thursday he
wanted tax rebates for families and breaks for businesses in an
economic aid plan that could total up to $150 billion.
But that failed to prevent investors from dumping stocks and
other risky assets as data on Thursday showed factory activity
in the U.S. Mid-Atlantic region contracted sharply in January
and home building in December fell to the slowest pace since
early 1990s. The benchmark Wall Street index hit a 15-month low.
The scale of losses by major investment banks hit by the
credit crisis became more evident on Thursday after Merrill
Lynch <MER.N> reported a fourth-quarter net loss of $9.8
billion, the largest in the company's history.
"We seem to be entering a bear market and have got to go
lower," said Edmund Shing, strategist at BNP Paribas Arbitrage
in Paris.
"People seem to be placing a lot of faith in the fiscal
package in the United States ... maybe the Democrats and
Republicans will agree in short measure on the package, but I
still see some downside regardless."
The FTSEurofirst 300 index <> was down 0.4 percent,
hitting its lowest since September 2006. MSCI main world equity
index <.MIWD00000PUS> was down 0.3 percent, having hit a
five-month low.
The dollar managed to rebound against a basket of currencies
<.DXY> after hitting a seven-week low this week.
Expectations for aggressive U.S. interest rate cuts this
year, starting with at least a 50 basis point easing this month,
have undermined the dollar.
Federal Reserve Chairman Ben Bernanke on Thursday threw his
support behind efforts to craft an economic stimulus package and
repeated that the U.S. central bank was ready to act
aggressively to counter recession risks.
But he specified that it was "critically important" that any
fiscal measures be designed to kick in quickly and deliver their
maximum impact within the next 12 months. Any other effect could
do more harm than good, Bernanke warned.
Emerging stocks, which had shown resilience at a time the
developed asset markets struggled with the credit crisis, failed
to outperform, falling by 0.4 percent <.MSCIEF>.
"The market is no longer viewing the U.S. economic slowdown
in isolation. Although domestic demand-based emerging growth
will provide a counterbalance, a cyclical global moderation now
appears more likely," UBS said in a note to clients.
"In this scenario, we expect the U.S. dollar to strengthen
once growth-seeking outflows and diversification pressures
subside as investors globally seek to recycle dollar funds back
into U.S. assets."
Emerging sovereign spreads <11EMJ> tightened 3 basis points.
The March Bund future <FGBLH8> was up 15 ticks.
U.S. light crude <CLc1> was up 0.3 percent after falling to
one-month lows earlier on concerns over the U.S. economy.
Gold <XAU=> was steady on the day at $876.40 an ounce.
(Additional reporting by Sitaraman Shankar, editing by Mike
Peacock)
