GLOBAL MARKETS-Growth, U.S. fiscal worries hurt shares, but Nikkei gains

Fri Nov 16, 2012 8:30am EST

* World shares head for 2nd weekly fall, European indexes all lower

* U.S. stocks to open lower as talks on "fiscal cliff" due to begin

* Japan's Nikkei rises 2.2 pct, yen steady near 6-1/2 month low

* Brent crude above $108 a barrel on Middle East tension

By Richard Hubbard

LONDON, Nov 16 (Reuters) - World shares were headed for a second consecutive weekly loss on Friday as uncertainty over U.S. budget talks, a weak economic outlook and violence in the Middle East weighed on investors.

Further falls were likely when Wall Street opens, according to stock index futures, as investors worry about progress in negotiations between U.S. President Barack Obama and Congressional leaders on tax and spending measures due later in the day.

The MSCI world equity index was down 0.1 percent on the day at 317.36 points but has lost almost two percent this week and about 4.5 percent since the outcome of the U.S. elections raised fears of a prolonged fiscal crisis.

"We need to see signs that it's going one way or another," Rabobank strategist Philip Marey said. "There's still a general perception that they'll be realistic and reach a deal, but if you listen to political commentators you may think financial markets are a bit optimistic."

Persistent worries about the euro zone's ability to deal with its debt problems, especially a row over aid to Greece, have added to the weakness in equity and currency markets.

Europe's FTSEurofirst 300 index of top companies shed 0.3 percent to 1,074.85 on Friday, putting it on course for its worst week since late September. London's FTSE 100, Frankfurt's DAX and Paris's CAC-40 were around 0.24 to 0.6 percent lower.

The euro was down 0.3 percent against the dollar at $1.2740 though well above Tuesday's two-month low of $1.2661.

"I think things are deteriorating steadily in Europe," said Neil Mellor, currency strategist at BNY Mellon, who expects ongoing weak economic data to keep pressure on the euro.

GREEK MOUNTAIN

Greece has taken centre stage in the three-year-old euro zone crisis as its international lenders squabble over how to bring down its debt pile, delaying a 31 billion euro aid payment necessary to keep the country afloat.

The head of the IMF, Christine Lagarde, who has cut short a tour of Asia to attend a Eurogroup meeting in Brussels on Nov. 20 aimed at resolving the dispute, said a deal was needed that would put the insolvent country's economy on a sustainable path.

Anxiety over the outcome of those talks saw 10-year German government bond yields fall half a basis point to 1.35 percent.

Elsewhere in the currency markets, the Japanese yen steadied at around 81.10 to the dollar having fallen sharply this week as investors adjusted to the likelihood of a change in government and the possibility of an easing in monetary policy.

Japanese Prime Minister Yoshihiko Noda paved the way for a snap election on Dec. 16 by dissolving the lower house of parliament on Friday. Shinzo Abe, leader of the main opposition Liberal Democratic Party, is widely expected to win the vote and has already called for the Bank of Japan to adopt interest rates of zero or below to spur lending.

"Only if the BOJ were to ease more aggressively will we see some weakness in the yen but it is not yet clear when this will happen," said Marcus Hettinger, global FX strategist at Credit Suisse in Zurich.

Earlier, Japan's Nikkei stock index bucked the global trend and rallied 2.2 percent to a two-week high. The index has risen 3 percent this week, helped by a 4.2 percent jump in the past two days.

CLIFF FACE

However, most of the market's attention is on Washington and the progress in efforts to resolve the so called 'fiscal cliff' facing the government at the end of the year.

Since last week's U.S. election, investors have become worried the giant economy could be tipped back into recession if no deal is reached to avoid the $600 billion in spending cuts and tax hikes due to take effect early next year.

Some in the markets are worried that efforts to reach a deal could result in tax hikes on wealthy investors, and have looked to lock in profits made from strong gains in U.S. share prices made this year.

"It's going to be a tough market in the next few weeks because we're going to get a lot of rumours coming out about whether there is a deal or not," Markus Huber, a senior trader at ETX Capital, said.

The broad S&P 500 index is still showing gains of around 7.5 percent for this year, but has lost nearly five percent this month with the falls all coming since election day.

Uncertainty about the fiscal cliff prompted analysts polled by Reuters to cut early 2013 U.S. growth expectations and has boosted demand for the perceived safety of U.S. Treasuries.

The yield on benchmark 10-year Treasuries fell to 1.58 percent on Friday, not far from a two-month low near 1.57 percent set earlier in the week.

Worries about the growth and the fiscal cliff also dominated commodity markets, though oil traders were becoming concerned that a flare up fighting between Israel and the Palestinians may draw in Arab producers and impact supply lines.

Brent crude gained 48 cents to $108.49 a barrel. U.S. oil rose 20 cents to $85.65.

Gold, which has tended to track riskier commodities in recent months as safe-haven seekers favour the dollar and U.S. treasuries, inched down to about $1,710 an ounce, on course for a weekly loss of around 1 percent.

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