Stocks, dollar stabilize after battering

By Natsuko Waki

LONDON (Reuters) - European stocks and credit markets steadied on Wednesday while the dollar rose as investors assessed how the U.S. mortgage sector's malaise would hit broader corporate and economic activity.

Credit spreads narrowed after blowing out earlier this week on troubles at the U.S. high-risk subprime mortgage sector. U.S. stock futures pointed to a firmer open on Wall Street a day after posting their worst one-day performance since March.

The FTSEurofirst 300 index .FTEU3 turned slightly into positive territory after hitting a one-month low. U.S. stock futures also rose after Web retailer Amazon.com (AMZN.O) reported strong profit and raised its outlook.

Investors have been torn between concerns about the negative impact on corporates from the U.S. housing downturn and satisfaction about positive earnings results from some firms.

"You don't want to keep beating up) the market if the earnings picture is okay," said Peter Dunay, investment strategist at Leeb Capital Management in New York.

The dollar bounced off the previous day's 15-year low against a basket of currencies .DXY. Rising risk aversion can underpin the dollar as U.S.-based investors repatriate their funds and foreign capital diverts to U.S. Treasuries.

"There is an increasing risk aversion which has led speculative accounts to pull back from local exposure, resulting in demand for the U.S. dollar," said Michael Klawitter, currency strategist at Dresdner Kleinwort in Frankfurt."

The MSCI world equity index .MIWD00000PUS was down 0.4 percent, having hit a record high last week. Chinese shares defied broader selling pressure, ending up 2.7 percent .SSEC, buoyed by anticipation of upbeat corporate earnings there.

European credit markets, having tumbled in the past few sessions, improved, with the iTraxx Crossover index tightening to 352 basis points.

FINANCING CONCERNS

Investors have worried the housing troubles could threaten banks with bad loans, dampen corporate activity and retrench consumer spending as more U.S. firms report a housing-related decline in earnings.

The recent repricing of low credit spreads also means firms are facing higher financing costs. This could dry up the stream of M&A deals which propelled world stocks to lifetime peaks only last week.

On Tuesday, a $3.5 billion bank loan financing for the buyout of a General Motors' unit was postponed -- the largest leveraged loan to be pushed back this year.

As the pipeline of funding issues stack up, Barings Asset Management said it would take several weeks for the system to clear.

"Companies will have to pay more for their debt in light of the recent jolt to credit markets. However, banks are still willing to lend and investors still appear willing to buy albeit at wider spreads. This is not yet a credit crunch," said Andrew Cole, director of asset allocation at Barings.