(Updates prices, comments, adds detail)
By Jeremy Gaunt, European Investment Correspondent
LONDON, Jan 21 (Reuters) - World stocks nosedived and demand
for safe-haven bonds and currencies soared on Monday as fears
gripped investors that a deteriorating U.S. economy would drag
others down with it.
MSCI's main world stock index <.MIWD00000PUS>, a benchmark
gauge of stock markets globally, sank 2.6 percent, falling below
its 2007 bottom to lows last seen in December 2006.
Its emerging market equities counterpart <.MSICEF> lost more
than 5 percent. Meanwhile, the spread between emerging market
bond yields and U.S. Treasury yields, a key gauge of risk
appetite, was just off its widest in two years.
"A mixture of weak global economic data, poor corporate
data, increasing fears about the possibility of a recession ...
have left investors drowning in a sea of red," said Henk Potts,
equity strategist at Barclays Stockbrokers.
The pan-European FTSEurofirst 300 <> was down 4.2
percent, taking its 2008 year-to-date losses to more than 13
percent.
Japan's benchmark Nikkei average <> earlier lost 3.86
percent to close at a two-year low and MSCI's main emerging
market stocks benchmark <.MSCIEF> was down 3.9 percent.
"Risk aversion is widespread as the market thinks (the
economic downturn) is not just a U.S. centric story," said Paul
Robson, currency strategist at RBS Global Banking.
U.S. stock markets were closed on Monday for a holiday, but
U.S. stock index futures were down sharply suggesting investors
were not putting much hope on Wall Street leading a rebound when
it returns to business.
Investors in Asia and Europe were carrying through from last
week's concern on Wall Street that a fiscal stimulus proposed by
President George W. Bush would not be enough to stop the U.S.
economy from falling into recession.
Bush called for a package worth up to $150 billion in tax
cuts and other measures.
Stock markets have been in full retreat this year over the
economic fears. The broad U.S. S&P index <.SPX> had its biggest
weekly fall since July 2002 last week.
Many indexes are now more than 20 percent below their recent
cycle peaks, a traditional sign that what is going on is not
just a correction but the start of a bear market.
"It's becoming more and more difficult as the market is now
in panic," said Hugues Rialan of fund manager Robeco.
RISK AVERSION
Such falls on equity markets sometimes signal to large
investors that it is time to buy. But leading investment bank
Morgan Stanley said on Monday that was not the case now, at
least as far as Europe was concerned.
"We are not compelled to buy yet despite bearish sentiment,"
its European equity strategy team said in a note. "We continue
to prefer cash over equities."
Recent polls show institutional investors with large cash
holdings, a sign of deep concern about the future direction of
assets.
The global equity market rout, meanwhile, promoted currency
investors to liquidate risky positions, lifting the low-yielding
Japanese yen while the dollar gained on the view no country will
escape the economic downturn.
The yen rose to a 2-1/2 year high against the dollar before
coming back a bit and high-yielding currencies in general sold
off.
The dollar was around 0.6 percent weaker against the yen at
106.08 yen <JPY=>. The euro was around 1.5 percent weaker
against the yen <EURJPY=>, below 154 yen for the first time
since late August.
The euro was also 0.9 percent down on the day against the
dollar at $1.4483 <EUR=>, slipping below $1.45 for the first
time in a month.
Demand rose for safe-haven government bonds.
The interest rate-sensitive two-year Schatz yield <EU2YT=RR>
was at 3.355 percent, sinking 10.5 basis points. It is down
around 65 basis points so far in January, well on track for its
biggest monthly decline in over 10 years, according to Reuters
charts.
The 10-year Bund yielded <EU10YT=RR> 3.916 percent, down 6.2
basis points.
(Editing by Mike Peacock)
