* Stocks sharply lower on poor earnings
* Wall Street set for steep fall
* Britain in recession, pound at 23-year low
* Two-year euro bonds at record low yield
By Jeremy Gaunt, European Investment Correspondent
LONDON, Jan 23 (Reuters) - Gloom about the global economy
spread to company earnings on Friday, pulling equities sharply
lower while Britain's formal arrival in recession hit the pound
again.
Wall Street looked set for steep losses at its open. General
Electric <GE.N> epitomised the mood, reporting a 44 percent drop
in quarterly profits.
Britain said its gross domestic product shrank 1.5 percent
in the fourth quarter <ECON>. Sterling hit a 23-year low against
the dollar <GPB=> below $1.36.
Earnings worries were to the fore. Japanese stocks ended the
week at a two-month closing low, dragged down by technology and
entertainment giant Sony's <6758.T> forecast of a record $2.9
billion annual loss on sliding demand.
It followed heavy losses overnight on Wall Street, where
Microsoft <MSFT.O> cautioned that it could no longer offer
profit forecasts for the rest of the fiscal year after posting a
quarterly profit that fell short of expectations.
In Europe, the FTSEurofirst 300 <> index was down
around 1.9 percent, looking set for its 12th session of decline
out of 13.
"Earnings have been as bad as expected," said Bernard
McAlinden, investment strategist at NCB Stockbrokers. "The test
is whether the markets have discounted that or not. But they
seem to be taking it nervously."
Japan's Nikkei stock average <> earlier lost 3.8
percent.
In a report on investment flows, State Street said its
latest calculations showed cross-border equity flows running at
one of the most risk-averse levels for a record 118 trading
days.
"The one optimistic sign is that emerging market flows have
rebounded," it said.
SAFETY
The mood of investor caution lifted currencies that
currently benefit from risk aversion.
The dollar was up 1.3 percent against a basket of major
currencies <.DXY>, with the euro <EUR=> falling 1.4 percent to a
six-week low. It was at $1.2802.
Britain's pound, which has fallen around 8 percent against
the dollar this week, was at $1.35.91 <GBP=>, down 1.9 percent.
"It is very much a case of continued worry about the global
economy," BNP Paribas currency strategist Ian Stannard said of
currencies in general.
Shorter-dated euro zone government bond yields hit a record
low as the market bet on further European Central Bank interest
rate cuts but yields on longer-dated paper rose on concerns
about heavy government borrowing.
The moves pushed the 2-10-year euro zone bond yield curve to
its steepest since mid-2004, according to Reuters charts. Bond
yields and prices move inversely.
The 10-year Bund <EU10YT=RR> yielded 3.13 percent, its
highest in two weeks and three basis points more than in late
Thursday trade.
Two-year yields were eight basis points down at 1.369
percent <EU2YT=RR>, having fallen as low as 1.364 percent
earlier, their lowest since at least 1999, according to Reuters
charts.
(Editing by Ruth Pitchford)
