Renewed risk aversion hurts global stocks

LONDON (Reuters) - Signs of risk aversion re-emerged on European markets on Tuesday, weighing on stocks and boosting government bonds, even after several days of cash injections from some of the world's major central banks.

Emerging market spreads edged wider, while the euro hit a one-month low against the dollar and the Japanese yen rose against some of the high-yielding currencies such as the New Zealand dollar as investors ditched riskier assets.

The negative tone was set by a dip in U.S. shares on Wall Street overnight, where Goldman Sachs (GS.N) reignited concern about the rise in volatility and the extent of the subprime lending crisis by saying it would invest $3 billion to prop up one of its flagship hedge funds.

"There have been signs since the late session on Friday of some stabilization in financial markets," said Lena Komileva, G7 economist at Tullett Prebon.

"However it remains uncertain how long this will last and it is too early to call an end to the investor crisis of confidence," she said.

MSCI'S main world stock index .MIWD00000PUS fell 0.3 percent. The index is still up 4 percent so far this year, but has shed almost 8 percent from the highs of 2007 in mid-July.

The FTSEurofirst 300 index .FTEU3 of leading European shares fell 0.6 percent, but this followed Monday's sizzling rally, which marked the biggest daily rise in 15 months.

"You are going to get volatility. We are firmly in the camp that thinks this is overdone and markets will regain their strength," said HSBC strategist Patrik Schowitz.

"Yesterday felt like we were out of the woods. That can be deceptive in these situations," he added.

ONGOING TURBULENCE

Adding to the unease over the recent market swings was Switzerland's UBS (UBSN.VX), the world's largest wealth manager, which delivered record earnings for the second quarter of the year, but gave an explicit warning that the upheaval in credit markets is likely to take a heavy toll if turbulent conditions prevail throughout the third quarter."

This followed Australian mortgage lender RAMS Home Loans (RHG.AX), whose shares slumped 19 percent in Sydney, after the firm said its earnings could be hit if global debt market remained volatile.

Tokyo stocks edged up 0.3 percent while Asian stocks outside Japan .MIAPJ0000PUS fell 0.7 percent.

Corporate borrowing spreads stabilized somewhat. The iTraxx Crossover index, the most-widely watched gauge of European credit sentiment, was little changed on the day.

Meanwhile MSCI'S emerging market equity index .MSCIEF fell 0.6 percent while JP Morgan's EMBI+ gauge widened 2 basis points to 207 over U.S. Treasury yields.

The European Central Bank entered a fourth day of pumping extra cash into the banking system, dampening expectations among currency investors for a rate increase in September.

The ECB has led other major central banks, including the Federal Reserve, in injecting billions of dollars into the money markets to prevent further spikes in overnight lending rates after banks scrambled for cash last week.

"The problems in the credit market have unsettled global capital markets and the market is now looking out for the next piece of bad news and this has led investors to look at getting out of risky positions," said Geoff Kendrick, currency strategist at Westpac.

Euro zone economic growth slowed far more sharply than expected in the second quarter with Germany and France among the laggards, reinforcing the view that the ECB may not need to raise rates again in September -- thereby undermining the euro.

The euro was last down 0.2 percent against the dollar at $1.3580 and held steady against the yen, which was buoyed by a degree of unwinding of riskier carry trades -- where investors borrow a low-yielder such as the yen to finance exposure to higher-yielding currenccurrenciess.

Sterling weakened sharply, falling below $2.00, and expectations of another UK interest rate increase were slashed after UK July inflation came in well below expectations at 1.9 percent. This was the first time since March 2006 it had fallen below the Bank of England's 2 percent target.

Gold fell as the dollar rallied against the euro but uncertainty in the credit markets and shaky equities lent the precious metals market a degree of support.

Spot gold was last at $668.00-668.60 an ounce, versus $669.50/670.30 late in New York on Monday.

Crude oil futures benefited from the concerted efforts of the central banks to keep the financial systems supplied with enough liquidity.

Brent crude futures rose 34 cents to $70.44 a barrel, helped in part by storms in the Atlantic, although there was no immediate threat to U.S. Gulf platforms and refineries.

(Additional reporting by Richard Barley, Simon Falush, Janet McBride and Sujata Rao)