* FTSEurofirst down 2.20 pct, banks lead losers
* MSCI World down 1.43 pct, MSCI EM down 2.64 pct
* Wall Street seen opening lower
By Claire Milhench
LONDON, May 19 (Reuters) - Fears of greater financial
regulation across Europe hammered stocks and buoyed core euro
zone bonds on Wednesday after German measures aimed at limiting
speculation were taken to smack of desperation.
Wall Street, troubled by progress in U.S. financial
regulatory reform, looked set to open lower.
Stock markets were unnerved by Germany's unilateral ban on
certain naked shorts announced late on Tuesday. And the euro
suffered a kneejerk reaction, falling more than 1 percent
against the yen, as investors saw foreign exchange as the only
way to bet against the euro zone.
World stocks as measured by the MSCI All-Country index
<.MIWD00000PUS> were down 1.43 percent whilst the more volatile
emerging markets index <.MSCIEF> fell 2.64 percent.
The FTSEurofirst 300 <> index of top European shares
tumbled 2.20 percent, with banks and commodity stocks the
hardest hit.
The index, which gained nearly 26 percent in 2009, is now
down 4.31 percent for the year amid persistent concerns about
the euro zone's debt problems.
There were also fears that the debt crisis was about to
worsen as some believed Germany's move smacked of desperation.
"Investors are somewhat spooked," said Stephen Pope, chief
global equity strategist at Cantor Fitzgerald. "The worry is
whether other markets will try and copy."
Germany banned naked short selling of shares in its 10 most
important financial institutions, euro-denominated government
bonds and credit default swaps based on those bonds. Naked short
selling is when an investor sells shares without borrowing them
first or ensuring they can be borrowed. []
German Bunds soared and the premium that investors demand to
hold 10-year Greek government bonds rather than German benchmark
Bunds rose as investors sought safe havens, although some
analysts said the market reaction was overdone.
Markets fretted that Germany's moves would be adopted by
other European regulators, but France denied it was considering
doing so and said it had not been consulted. []
"Market participants concluded that the move was ill-thought
out, uncoordinated, and likely ineffective," said Mark Chandler,
global head of FX strategy at Brown Brothers Harriman. "This
would seem to be yet another case of a European government
taking the wrong fork in the road."
EURO UNDER PRESSURE
The euro <EUR=> was also put under pressure after German
Chancellor Angela Merkel said the currency was in danger in a
speech to parliament in which she urged the European Union to
speed up financial market supervision. []
The struggling currency fell more than 1 percent on the day
versus the yen, as the low-yielding Japanese currency rose
broadly on risk aversion.
Against the dollar it struggled up from fresh four-year lows
hit in early Asian trade to $1.221, but was still down 14.76
percent year to date.
"The reaction in the euro is due to all the uncertainty that
this brings -- there have been fiscal problems, liquidity
problems and now there is regulation on top of that," said Niels
Christensen, currency strategist at Nordea in Copenhagen.
Earlier in Japan, the Nikkei stock index <> closed down
0.5 percent to a near three-month closing low.
Wall Street looked set to open lower after Republican
senators reached a compromise with Democrats on the balance of
power between state and federal officials over bank oversight,
allowing a landmark Wall Street reform bill to move towards
final passage. []
The U.S. dollar rose to 87.284 against a basket of
currencies <.DXY> after touching a 14-month high as investors
sought safer havens for their cash.
In fixed income markets, the 10-year Greek/German government
bond yield spread <GR10YT=TWEB><DEU10YT=TWEB> widened to 521
basis points from 504 bps at the European settlement close on
Tuesday.
Greek, Spanish and Portuguese credit default swaps all
tightened as participants closed out short risky positions in
thinning liquidity.
(Additional reporting by Joanne Frearson, Natsuko Waki, Jessica
Mortimer; Editing by Susan Fenton)
