* MSCI world equity index down 0.7 percent at 338.91
* Sterling and other high-yielding currencies tumble
* BoE report, Japan GDP, JPMorgan fan credit/economy worries
By Natsuko Waki
LONDON, Aug 13 (Reuters) - Investors cut back on risky
assets on Wednesday, dumping stocks and high-yielding currencies
on global credit and economic worries while they pushed sterling
to a 11-1/2 year low after a Bank of England inflation report.
Wednesday's data provided fresh evidence that U.S. economic
problems are spilling over to the rest of the world. Japan's
economy contracted in the second quarter at the sharpest rate in
seven years, reinforcing the view that the world's No. 2 economy
has slipped into recession.
In the quarterly report which highlighted the possibility of
a UK recession, the BoE said domestic inflation will fall below
its 2 percent target in two years and warned that growth risks
remained on the downside.
"The tone is clearly dovish, with the economy now expected
broadly to stagnate over the next year or so," said Jonathan
Loynes, chief European economist at Capital Economics.
"Against that background, we stick to the view that interest
rates will eventually fall very sharply once inflation pressures
finally recede. Market rate expectations therefore have scope to
fall much further in time."
Sterling fell as low as $1.8737 <GBP=> while it hit a 11-1/2
year low on the trade-weighted index <=GBP>.
The MSCI main world equity index <.MIWD00000PUS> fell 0.7
percent while emerging stocks <.MSCIEF> fell to a one-year low
of 975.37.
The FTSEurofirst 300 index <> fell more than 1
percent. U.S. stock futures <SPc1> fell 0.2 percent, pointing to
a weak open on Wall Street.
News that JPMorgan <JPM.N> has racked up $1.5 billion of
losses so far this quarter on mortgage-linked assets and an
outlook warning from Commonwealth Bank of Australia <CBA.AX>
reminded investors that the fallout from the year-old credit
crisis is far from over.
HIGH-YIELDING VICTIMS
The New Zealand dollar, which boasts the highest interest
rate in the industrialised world, fell 2 percent to a two-year
low near 74 yen <NZDJPY=R> while the Aussie also fell 2 percent
to a four-month low near 93 yen <AUDJPY=R>.
The two currencies have been under pressure as expectations
intensify that falling commodity prices will encourage central
banks there to cut interest rates.
"With real policy rates in the region set to fall,
both economies are likely to see a more protracted spell of high
inflation, a risk that will be exacerbated if the trade term
gains over the past years are to reverse course going forward,"
Simon Wong, economist at Standard Chartered, said in a note.
"Another challenge will come from potential adjustments in
external balance in reaction to lower real returns on the
region's financial assets that could undermine the supply of
foreign funding to the domestic financial sectors."
The dollar was down 0.3 percent against a basket of major
currencies <.DXY>, after hitting a six-month high on Tuesday.
Emerging sovereign spreads <11EMJ> widened 1 basis point.
The September Bund future <FGBLU8> rose 23 ticks on concerns
over the economy.
U.S. light crude <CLc1> steadied at $112.99 a barrel, having
fallen more than $30 from its record peak in July. Gold <XAU=>
rose to $815.55 an ounce after hitting an eight-month low on
Tuesday.
(Editing by Ron Askew)
