Debt fears hurt global stocks, euro

NEW YORK Mon Jul 18, 2011 4:45pm EDT

NEW YORK (Reuters) - World stocks and the euro stumbled on Monday, while gold prices jumped to a record high on fears that no imminent solutions to the European and U.S. debt problems could allow them to spiral into a global crisis.

European officials and bankers remained divided over steps to keep the fiscal woes of heavily indebted nations from spreading. The euro zone's 17 national leaders will meet on Thursday in Brussels in an attempt to finalize a second round of financial aid for Greece worth 110 billion euros ($154 billion).

"We are in the midst of a political crisis that has not offered any viable solution," Jurgen Odenius, principal of international economics and investment strategy at Prudential Fixed Income in Newark, New Jersey, which oversees $240 billion in assets, said of the European debt crisis.

"Given the wrangling, I think it's increasingly clear that we are in a situation that lacks major leadership," he said.

Anxiety about a potential Greek default and its repercussions across Europe remains high even after stress tests for euro zone banks released on Friday showed most of them have enough capital to weather such an event. The results did not wipe out doubts about the banking system if the crisis deteriorates further.

In the United States, as the clock ticks toward the August 2 deadline for an increase in the statutory $14.3 trillion borrowing limit, investors were nervous about the stalemate in Washington and chances of the economy slipping into a recession only two years after the last one.

The lack of progress in negotiating a U.S. fiscal package has already led all three major ratings agencies to warn of a credit rating downgrade in the event of a U.S. default. Such a move, some traders fear, could send interest rates soaring and erode the U.S. dollar's reserve currency status.

These worries sapped U.S. stocks, with the Standard & Poor's 500 index briefly touching its lowest in three weeks.

The Dow Jones industrial average .DJI lost 94.57 points, or 0.76 percent, at 12,385.16. The S&P 500 Index .SPX fell 10.70 points, or 0.81 percent, to 1,305.44. The Nasdaq Composite Index .IXIC was down 24.69 points, or 0.89 percent, at 2,765.11. For more, see .N

A sell-off in bank shares knocked European stocks .FTEU3 down 1.7 percent to their lowest levels since early December, while the MSCI world equity index .MIWD00000PUS fell 1.3 percent to its lowest since late June.

Nikkei futures in Chicago ended at 10,015, compared with the Osaka close of 9,970.

GOLD, SWISS FRANC SHINE

As worries over fiscal burdens persist, investors have been scrambling to shelter their money in cash, gold, the Swiss franc, the Japanese yen and other less-risky investments.

"There is still a great concern about the (euro zone) peripheral debt crisis and in the U.S. we have our own issues with the consensus the U.S. is on downgrade watch," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York. "The yen and the Swiss franc are benefiting as safe havens more than the dollar."

The euro managed to trim early losses against the U.S. dollar and Japanese in late New York trading. It was down 0.2 percent against the dollar at $1.41200 and down 0.4 percent at 111.54 yen.

The safe-haven Swiss franc hit record highs against the dollar and euro. For more, see <FRX/>

Spot gold rose to an all-time peak of $1,607 an ounce after rising for an unprecedented 11th day. See <GOL/>

Unease over a U.S. default seeped into the U.S. Treasuries market, stoking selling in longer-dated debt. But safe-haven bids on Europe's debt crisis supported shorter maturities.

The 30-year Treasury bond lost 31/32 in price to yield 4.30 percent versus 4.25 percent on Friday.

Prices on two-year Treasury notes were little changed for a yield of 0.37 percent. See <US/>

Worries over sovereign defaults on either side of the Atlantic and their possible toll on the world economy and energy demand pushed oil prices lower. U.S. crude futures were down 1.3 percent at $95.98 a barrel. <O/R>

(Additional reporting by Aleksandra Michalska, Nick Olivari, Karen Brettell, David Sheppard, and Frank Tang; Editing by Dan Grebler)

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