(Updates with European equities extending losses, Wall Street
outlook)
By Jeremy Gaunt, European Investment Correspondent
LONDON, Jan 28 (Reuters) - Persistent fears about the world
economy battered global stocks again on Monday and drove
investors towards safer assets despite expectations of more
interest cuts from the Federal Reserve to bolster growth.
Equity markets in Europe and Asia fell sharply with the
pan-European FTSEurofirst 300 <> down around 2 percent,
taking January's losses alone to more than 13 percent.
Japan's Nikkei <> early dropped nearly 4 percent on
worries that the U.S. economy was already dragging Japan's down
into recession.
Wall Street also looked set for a poor start with stock
index futures pointing at sharp early losses.
"People remain pretty nervous. We haven't seen the full
extent of the fall-out of subprime," said Jan Smedts, deputy
head of equities for Dexia Group, referring to losses and
turmoil in the U.S. mortgage sector.
Monday's losses on equity markets came despite efforts last
week by U.S. authorities to stop that country's economic
downturn, which is exacerbated by subprime losses and credit
market worries.
It included an emergency 75 basis point Fed cut, a $150
billion fiscal stimulus plan from the White House and early
discussions on how to bail out insurers whose underwriting of
debt may yet trigger a new wave of losses.
The Fed is also expected to cut interest rates again this
week with interest rate futures showing the market betting on
another 25 or 50 basis points in cuts, possibly taking rates as
low as 3.0 percent.
But many investors do not see these various moves having
much immediate impact and remain in a strongly risk averse mood.
"In our view, the cuts already enacted, and the Fed's bias
toward additional rate cuts, should help increase credit
availability -- the jury is still out, however, as to whether
this will happen fast enough," investment house BlackRock said
in a note late last week on market volatility.
SEEKING SAFETY
Currency investors have been using stocks as a guide for how
much risk to take, favouring risky carry trades -- in which the
low-yielding Japanese yen is used as a source of cheap funds to
buy higher-yielding currencies -- whenever equities rally and
reversing those trades when they fall.
Accordingly, the yen was firmer across the board,
The dollar, however, was being dragged down by the economic
worries and prospects for lower interest rates.
The dollar fell 0.25 percent against a basket of major
currencies to 75.789 <.DXY>. The euro rose 0.4 percent to
$1.4722 <EUR=>.
The dollar also eased to 106.40 yen <JPY=>, down 0.3
percent, bringing its losses since the start of January to
nearly 4.5 percent -- likely heading for its worst monthly
performance in over 4 years.
Euro zone government bonds were generally higher as the
economic worries boosted demand for lower-risk debt.
"It's stocks down, bonds up again," said a trader in London.
Two-year yields <EU2YT=RR>, which are sensitive to changes
in interest-rate expectations, were 3 basis points lower at
3.404 percent. Ten-year yields <EU10YT= RR> were also down 3
basis points at 3.943 percent, below the psychologically
important 4.0 percent level.
