(Adds Wall Street outlook)
By Natsuko Waki
LONDON, March 3 (Reuters) - World stocks tumbled while the
dollar plumbed record lows on Monday as fresh concerns about the
health of the banking sector and a U.S. recession drove
investors to safe-haven gold and government bonds.
Emerging markets took a beating as investors dumped risky
assets, while the cost of corporate bond insurance rose after
last week's weak U.S. confidence data and a regional business
survey intensified worries about the world's biggest economy.
HSBC <HSBA.L> announced bigger-than-expected bad debts of
$17.2 billion due to problems in the U.S. housing market. The
global banking sector is expected to suffer a total of $300-400
billion write-downs from the credit crunch, threatening to
derail growth in the broader economy.
"The market has no confidence in global growth, particularly
growth in the United States, and has great fears of the credit
crisis," said David Buik of Cantor Index.
The FTSEurofirst 300 index <> was down 1.7 percent on
the day while MSCI main world equity index <.MIWD00000PUS> fell
1.3 percent to hit a one-week low.
HSBC shares fell more than 1 percent before turning
positive, while the broader bank sector index <.SX7P> was down
1.8 percent on the day in Europe, dragging down broader indices
along with technology and insurer shares.
Also souring sentiment, billionaire investor Warren Buffett
told CNBC he was no longer offering to guarantee $800 million of
municipal bonds backed by three large U.S. bond insurers.
Uncertainty over the fate of these bond insurers has spooked
investors for weeks as potential downgrades of their ratings due
to their exposure to U.S. subprime mortgages could set off a
wave of forced selling and lead to more losses by banks.
U.S. stock futures slipped half a percent <SPc1>, indicating
a weaker opening on Wall Street after major indexes ended the
month in the red for the fourth month in a row, marking the
longest string of monthly losses for Dow and S&P 500 since 2002.
The dollar fell to all-time lows against a basket of major
currencies <.DXY> as recession fears cemented expectations for
U.S. interest rate cuts with investors pricing in a more than 70
percent chance of a three-quarter point rate cut in March.
The dollar also hit a three-year low against the
low-yielding yen of 102.62 <JPY=>, with export-damaging yen
strength weighing on Japanese shares <>.
GROWTH/INFLATION TRADEOFF
Expectations that the Federal Reserve and other central
banks would cut interest rates to spur the ailing economies have
kept world stocks off January's 15-month low, although
inflationary pressures might discourage monetary authorities
from easing dramatically.
Data showed euro zone inflation held at record 3.2 percent
last month, while a survey found the region's manufacturing
activity eased in February but prices charged at the factory
gate rose at their fastest pace in nearly a year.
Recent U.S. data also showed acceleration in both producer
and consumer price rises in February.
"We are seeing the deepest housing deflation since the Great
Depression and a massive unwind of the largest credit binge
ever, and fiscal and monetary policies are more limited in their
ability to respond than earlier this decade. Not good news for
the economy or the equity market," David Rosenberg, North
American economist at Merrill Lynch, said in a note.
Central banks in the euro zone and Britain are expected to
leave interest rates on hold this week. The Bank of England is
forecast to cut rates again in May, while interest rate futures
are pricing in an around 70 percent chance of a euro zone rate
cut by June, up from 20 percent last week.
The iTraxx Crossover index <ITCRS5EA=GFI>, the most-widely
watched indicator for European credit market sentiment, widened
to 612 basis points.
Emerging sovereign spreads <11EMJ> hit 291 basis points over
U.S. Treasuries, their widest in five weeks. Emerging stocks
<.MSCIEF> fell 2.6 percent.
Euro zone government bonds were higher, with ten-year yields
hitting a three-week low of 3.835 percent <EU10YT=RR>. The March
Bund future <FGBLH8> was up 37 ticks.
Gold <XAU=> -- seen as an inflation hedge and safe-haven
asset -- rose as high as $984.60 an ounce while silver <XAG=>
rose to $20 an ounce for the first time since November 1980.
U.S. light crude <CLc1> fell 0.6 percent to $101.19 a
barrel, below last week's record highs, as concerns rose that a
U.S. recession would sap demand for oil.
(Additional reporting by Dominic Lau, editing by David
Christian-Edwards)
