* Europe stocks in downward spiral as Asia, Wall Street
fall
* Euro at lows, pound battered by UK election uncertainty
* Investors obsess on debt woes; but may be over-reacting
By Koh Gui Qing and Miral Fahmy
SYDNEY/SINGAPORE May 7 (Reuters) - European stocks are
primed for a pummelling on Friday, following ravaged U.S. and
Asian shares, as Europe's debt crisis sent waves of dread
through global markets and battered sterling and the euro.
U.S. stocks plunged 9 percent in the last two hours of
trading on Thursday before clawing back some of the losses as a
suspected trading glitch and fears of a new credit crunch in
Europe threw markets into disarray. []
Sterling was especially hard hit, falling to a one-year low
against the dollar, as well as shedding gains against the euro
as UK elections seemed likely to result in no clear winner
[]. It shed 12 yen against the safe-haven Japanese
currency at one point <GBPJPY=>.
However, unlike the worst days of the 2008 credit crisis,
when money poured out of riskier assets like equity funds and
into money market funds, investors are not retreating
completely.
"Participants are unclear on where the market is going,"
said Scott Bennett, head of Asian credit at Aberdeen Asset
Management in Singapore. "Views diverge, but they are all clear
that they don't want to be here now and so the market is
selling off."
By 0632 GMT, futures for STOXX Europe 50 <STXEc1>,
Germany's DAX <FDXc1> and France's CAC 40 <FCEc1> were down 2.1
to 2.7 percent. Spreadbetters expected Britain's FTSE 100
<> to open as much as 130 points or 2.5 percent lower.
Investors in Asia, however, appear to have realised they
may have overreacted to the U.S. carnage.
Japan's Nikkei <> skidded nearly 4 percent to a
two-month low in its worse day in slightly over a year, but it
pared losses on short-covering.
Asian shares, which fell 2.4 percent, the biggest daily
drop in three months, also reclaimed some losses by
mid-afternoon. The MSCI index of Asian shares outside Japan was
down 1.9 percent <.MIAPJ0000PUS>.
Greece's 110 billion ($140 billion) bailout has been a
plumb-line for markets since the start of the week. The MSCI
world share index <.MIWD00000US> has fallen 7 percent since
Monday, while the MSCI index for Asian shares excluding Japan
was down 8.25 percent.
Investors are unconvinced Greece can achieve the austerity
measures it has pledged in return for a rescue and fear that
problems faced by other debt-ridden euro zone economies may
jeopardising the economic health of the whole bloc.
Europe equity funds saw more than $2 billion in net
outflows in the week to May 5, the most in a year, as fears
grew of a euro zone sovereign debt crisis, EPFR Global said on
Friday.
Money market funds had net outflows of $18 billion in the
week, indicating some investors were still putting cash to work
in fresh positions elsewhere, the fund tracker said.
The euro <EUR=>, which fell to 14-month lows of $1.2510 on
Thursday, steadied in Asia just under $1.27 after the United
States said G7 finance ministers would discuss Greece's bailout
in a telephone call. []
Euro zone leaders also meet later in the day in a special
summit, while Germany's parliament is to vote on the Greek
bailout plan.
The United States is due to report U.S. non-farm payrolls
and unemployment data for April, and while the numbers are
expected to be strong, pointing to an economic recovery,
analysts said any market reaction is likely to be muted by the
debt debacle. []
"Traders are anticipating a better open to U.S. equities
after the strong rebound in the Australian dollar and the
Japanese yen and potentially strong data," said Robert Rennie
of Australia's Westpac Bank.
"If, and it is a very big if, the carnage in U.S. equity
was down to human error rather than Greek developments, we
could actually see a positive reaction to a good payroll
outcome."
The debt crisis is threatening to raise funding costs for
European governments and some companies as investors demand
bigger premiums for the higher risks or shun such bonds.
Interbank rates, which banks charge each other for
short-term loans, rose on Thursday on fears that the euro debt
crisis will worsen and credit markets could seize up as they
did in the credit crunch in 2008, which helped throw economy
into recession.
"This brief rerun of the darkest days of 12-24 months ago
is a real confidence killer for leveraged investors, not to
mention the rest of us," said Rory Robertson, an interest rate
strategist at Macquarie in Sydney.
"The real worry is that the growing risk aversion via
growing problems in Europe is driving up funding costs across
the global financial system."
The dash for safety pushed gold <XAU=> to near record highs
and 10-year U.S. Treasury yields to five-month lows.
The dollar index <.DXY> held near one-year highs at 84.9,
as the U.S. currency gained elsewhere from the super safe-haven
status of Treasuries.
(Editing by Jan Dahinten)
