* MSCI world equity index down 0.65 pct at 338.18
* Merrill writedowns, weak economic data add to gloom
* Oil rises on supply concerns, New Zealand dollar slides
By Natsuko Waki
LONDON, July 29 (Reuters) - World stocks hit a two-week low
on Tuesday after Merrill Lynch <MER.N> said it would take a $5.7
billion writedown to offload toxic debt, upsetting investors
already nervous about the health of the financial sector.
Data from major economies added to the gloom, as French
consumer morale, UK retail sales and mortgage approval hit
record lows while Japan's jobless rate set a near two-year high
in an economy that probably contracted in the second quarter.
Oil rose for a second day in a row from last week's
seven-week trough as tensions in Iran and Nigeria stirred supply
concerns, while the New Zealand dollar slid after a media report
on liquidity problems at one of the local funds.
The news from Merrill, the third largest U.S. bank, came
after U.S. regulators closed two regional banks on Friday,
marking the sixth and seventh bank failures this year as the
sector suffers from the deepest housing slump since the Great
Depression.
That series of events, combined with mixed quarterly
results, raised concerns that the fallout from the credit crisis
has much further to run.
"The banks are obviously suffering badly from the hands of
Merrill Lynch," said David Buik, strategist at BGC Partners.
"Sentiment is very brittle. There is considerable concern
that we are going to see more banking writedowns in the next two
or three months."
The FTSEurofirst 300 index <> fell 1 percent while the
MSCI main world equity index <.MIWD00000PUS> lost 0.7 percent to
hit a near two-week low, having fallen for four days in a row.
U.S. stock futures were down around 0.1 percent <SPc1>,
pointing to a weaker start on Wall Street later.
Merrill said it would raise $8.5 billion by selling new
stock and in a sign of how toxic its debt holdings have become,
it agreed to sell $30.6 billion of collateralised debt
obligations (CDOs) for about 22 cents on the dollar.
The bank unveiled its third-quarter writedown less than two
weeks after posting a $4.9 billion second-quarter loss.
LIQUIDITY SCARE
The New Zealand dollar <NZD=> was the day's main loser in
the currency market, falling as much as 0.8 percent to $0.7394
after New Zealand Press Association said local fund Guardian
Trust has suspended new investment and withdrawals in one of its
funds worth NZ$249 million due to liquidity issues.
"Whilst the deteriorating growth backdrop and bias for the
Reserve Bank of New Zealand easing has been the major driver for
our bearish NZD call versus euro, the news of negative
developments in the New Zealand financial sector merely adds to
the list of negatives for the currency," JP Morgan said.
The news comes after Hanover Finance, the country's
fifth-largest non-bank finance firm, suspended repayment of
loans and interest last week.
More than 20 non-bank finance companies have collapsed or
sought to delay and restructure the repayment of deposits worth
close to NZ$2 billion in the past two years.
Asset managers and corporates around the world have suffered
the rise in the cost of borrowing as a result of the
one-year-old credit crisis originating in the troubled U.S.
housing market.
The International Monetary Fund said on Monday the bottom of
the U.S. housing downturn was not yet visible and kept its
estimate that losses in U.S. assets related to the subprime
crisis could reach $1 trillion.
The dollar steadied against a basket of major currencies
<.DXY>. It rose 0.2 percent to 107.55 yen <JPY=> having risen
above 108 on Monday.
Emerging sovereign spreads <11EMJ> tightened 1 basis point
while emerging stocks <.MSCIEF> fell 1.5 percent.
The September Bund future <FGBLU8> rose 21 ticks as
safe-haven government bonds attracted risk averse capital.
U.S. light crude <CLc1> rose 0.3 percent to $125.24 a barrel
-- still more than $20 below its record high -- while gold
<XAU=> rose to $931.35 an ounce.
(Additional reporting by Dominic Lau; Editing by Victoria Main)
