* MSCI world equity index sees five-year low
* Panic selling hits U.S., European, Asia bourses
* Dash for cash even hits government bonds; yen, gold rise
(Updates prices, adds LIBOR, changes byline, dateline,
previous LONDON)
By Clive McKeef and Natsuko Waki
NEW YORK/LONDON, Oct 10 (Reuters) - U.S. stocks plunged in
early Friday trading in line with markets in Europe and Asia
but then recovered some ground, with investors looking to an
imminent G7 finance ministers meeting in Washington, D.C. for a
further policy response to the deepening global credit crisis.
The MSCI world equity index <.MIWD00000PUS> fell more than
4.0 percent at one point to a five-year low, losing a fifth of
its value this month alone. The index has lost 43 percent since
January, on track for its worst weekly, monthly and yearly
performance in 20 years.
Bond yields in the United States and Europe also rose as
the worsening crisis pushed investors into selling in a mad
scramble to turn any investment they had into cash.
The U.S. dollar and gold were the main beneficiaries of
falling world financial asset prices, as investors moved out of
riskier markets into cash in U.S. dollars and safe havens.
The Dow Jones Industrial Average fell 8.0 percent minutes
after the opening bell and the S&P 500 was off more than 7.0
percent, before cutting the bulk of those losses.
The Dow Jones industrial average <> was down 1.31
percent, at 8,568.67 by midmorning, while the Standard & Poor's
500 Index <.SPX> was down 1.27 percent, at 898.31.
"We are extremely oversold right now. Everybody was looking
for a hard, hard sell-off at the open and we got it. So this is
a classic come-back from a sell-off at the open," said Angel
Mata, managing director of listed equity trading at Stifel
Nicolaus Capital Markets in Baltimore.
"This is a psychological oversold bounce. Technicals have
nothing to do with this."
U.S. Treasuries mostly fell, with only short-term Treasury
bills, considered a cash equivalent, seeing any demand.
"We are not used to seeing stocks implode and Treasuries
sell off (at the same time)," said Josh Stiles, senior bond
strategist at IDEAglobal, "but people are saying they don't
even want to be in Treasuries now, they need the cash."
"It is hard to get new buyers when everyone is trying to
raise cash," he said.
The benchmark 10-year U.S. Treasury note <US10YT=RR> was
trading 26/32 lower in price for a yield of 3.88 percent from
3.78 percent late on Thursday, while the 2-year Treasury note
<US2YT=RR> was 7/32 lower for a yield of 1.65 percent from 1.53
percent.
The only buying of debt was on the very short end of the
Treasury curve, where one-month T-bill <US1MT=RR> yields were
trading all the way down near 0.07 percent.
Tensions persisted in the money market, where the cost of
borrowing dollars for three months rose to 4.81875 percent
<LIBOR> at the fixing in London.
In currency markets, increased risk aversion left the yen
as the currency of choice, with the euro earlier falling to a
three-year low of 132.80 yen <EURJPY=> and the dollar hitting a
6-1/2-month low of 97.92 yen <JPY=>.
As investors scrambled for cash in U.S. dollars, the U.S.
Intercontinental Exchange's dollar index <.DXY> hit a 14-month
peak against major currencies at 81.939 before retreating to
trade up 0.5 percent on the day at 81.838. The euro was down
0.3 percent against the dollar at $1.3557 <EUR=>.
Fears about Britain's vulnerability to the financial crisis
sent the pound <GBP=> tumbling to a five-year low of $1.6802.
U.S. crude oil <CLc1> fell 5 percent to a one-year low of
$81.13 a barrel as fears rose over cooling demand for energy,
while gold prices <XAU=> rose initially to a two-month high
around $931.00 an ounce in a classic safe-haven bid.
G7 IN FOCUS
Investors are looking to the weekend's meeting of leaders
from the Group of Seven major industrial nations. However,
hopes for a comprehensive deal to help to solve the crisis are
fading fast. For more see [].
"It is not clear we will see much from the G7 meeting and
this will probably keep risk appetite under pressure," said Rob
Minikin, senior currency strategist at Standard Chartered.
Coordinated interest rate cuts by the Federal Reserve and
other major central banks this week failed to relieve investor
fears that the freeze in credit markets will damage banks
further and provoke a deep recession around the world.
"Essentially we're flying blind. No-one has a clue what's
going on," DZ Bank currency strategist Sonja Marten said. "The
uncertainty is too great and volatility is incredible. It's a
question of market confidence and somehow we're going to have
to get it back."
G7 leaders face huge pressure to contain the crisis.
Earlier Friday Europe and Asia saw panic selling of stocks
while oil prices fell to a one-year low as fears grew
policymakers are not making enough efforts to contain the
financial crisis.
Equity trading in Russia, Iceland, Romania, Ukraine and
Indonesia was halted .
Emerging stocks <.MSCIEF> fell nearly 5 percent to a fresh
three-year low.
(Additional reporting by Ellis Mnyandu, Kristina Cooke and
Chris Reese in New York and Steve Slater, Rebekah Curtis and
Jessica Mortimer in London; Editing by James Dalgleish)
