* MSCI world equity index down 0.6 pct at 240.91
* Sterling tumbles after S&P cuts UK ratings outlook
* Stocks slip, dollar hits lowest in almost 5 mths after Fed
By Natsuko Waki
LONDON, May 21 (Reuters) - Sterling tumbled from an earlier
six-month peak and London stocks fell on Thursday after Standard
& Poor's revised down its UK ratings outlook, while world stocks
slipped after the Federal Reserve cut the U.S. economic outlook.
Britain, whose economy is in recession after the credit
crisis hit its financial sector, has been boosting government
borrowing to finance its massive fiscal easing programme. Data
released just after ratings agency S&P's move showed domestic
public borrowing hit a record high for the month of April.
The S&P lowered its outlook on Britain to negative from
stable, because the UK's government debt burden may approach 100
percent of gross domestic product, although it affirmed the
current triple-A ratings.
"This is a reality check for the UK government. They are not
the U.S," said Kenneth Broux, economist at Lloyds TSB Corporate
Markets.
"(The debt to GDP ratio) is set to rise sharply. Whether we
get to 100 percent depends on the bank liabilities. But
obviously S&P think the recession means more red ink and the
latest borrowing estimates are unsustainable.
Sterling fell to 88.47 pence per euro <EURGBP=> after
hitting its highest level against the euro in 3-1/2 months of
87.23 per euro.
Against the dollar, it was trading at $1.5609 <GBP=>,
falling sharply from an earlier six-month peak above $1.58. The
June gilt future also tumbled, down 50 ticks at 119.46 <FLGM9>.
The cost of protecting UK government debt against default
rose 2.3 basis points to 75.8 bps after the S&P move, according
to CMA DataVision.
EQUITY SETBACK
World stocks slipped from this week's six-month peak and the
dollar fell to its lowest in almost five months after the
Federal Reserve lowered its forecast of U.S. economic growth for
the next three years.
Minutes from its April meeting showed the Fed projected the
world's biggest economy to contract by up to 2 percent this year
with the unemployment rate rising to as high as 9.6 percent.
They also showed that Fed policymakers had considered buying
more securities to spur recovery -- a move which would inject
more dollars into the market.
Wednesday's disappointing 2009 outlook from Hewlett-Packard
<HPQ.N>, the world's biggest PC maker, also fanned concerns
about corporate profits in a slowing economy.
"There are concerns finally coming through about where the
underlying growth is going to come from," said Justin Urquhart
Stewart, investment director at Seven Investment Management.
"We need a growing level of demand. There's a certain amount
of restocking happening, and unfortunately the market has been
taking that as a sign of a recovery, which it is not."
MSCI world equity index <.MIWD00000PUS> fell 0.6 percent
after surging to levels last seen in early November on
Wednesday.
The FTSEurofirst 300 index <> fell 1.7 percent while
emerging stocks <.MSCIEF> fell half a percent.
The setback comes after an almost uninterrupted rally from
mid-March pushed the benchmark MSCI index up 42 percent.
U.S. crude oil <CLc1> -- whose prices are closely correlated
with growth expectations -- fell 2.2 percent to $60.65 a barrel
after hitting a six-month peak above $62 on Wednesday.
Despite the fall in risky assets, there have been signs that
the worst may be over for the global economy.
The euro zone's services and manufacturing sectors
contracted less than expected in May as firms saw the pace of
decline in new orders ease. Markit's euro zone flash services
purchasing managers' index rose to 44.7 in May from 43.8 last
month, beating the consensus estimate of 44.5.
In a further sign of easing tensions in money markets,
short-term dollar funding costs dropped further to fresh lows in
Asia. In Singapore, 3-month dollar costs <SIUSDD=ABSG> fell 4
basis points from Wednesday to 0.70917 percent, nearly half the
levels in March.
On Wednesday, the Volatility Index -- Wall Street's fear
gauge -- fell as low as 26.57 <.VIX> at one point, hitting its
lowest level since Sept. 15, when Lehman Brothers filed for
bankruptcy.
The June bund futures <FGBLc1> was steady on the day.
The dollar <.DXY> was down 0.1 percent against a basket of
major currencies, having hit its lowest level since early
January earlier.
(Additional reporting by Sitaraman Shankar and Atul Prakash;
Editing by Victoria Main)
