GLOBAL MARKETS-Stocks knocked by credit fears, bonds rise
(Updates prices, adds comments)
By Ian Chua
LONDON, Jan 31 (Reuters) - Jitters about further losses for the financial sector got the better of investors on Thursday, keeping global stocks under pressure and on track for their steepest monthly slide in over five years.
Wall Street looked set for a weak start with stock futures SPc1DJc1NDc1 wallowing in the red as investors took cover in the safety of government bonds after Fitch Ratings downgraded bond insurer FGIC Corp's credit rating.
Standard & Poor's said it cut or may downgrade the ratings of hundreds of billions of dollars of U.S. mortgage-backed securities and collateralised debt obligations, taking the shine off another hefty interest rate cut by the Federal Reserve.
If bond insurers, or monoliners, lose their top "AAA" ratings, U.S. financial institutions will face fresh write-downs of as much as $70 billion, according to Meredith Whitney, banking analyst at brokerage Oppenheimer & Co.
"What's surrounding the monoline insurers is very important for the market because of the consequences it'll have for banks," said Thierry Lacraz, a strategist at Pictet & Cie.
This overshadowed the Fed's move on Wednesday to slash its key fed funds rate by 50 basis points to 3 percent -- the lowest since June 2005 -- following last week's emergency 75 basis point cut to halt a sharp slowdown in an economy struggling with a housing slump and credit crunch.
The FTSEurofirst 300 .FTEU3 index of top European shares fell 1.6 percent with Germany's DAX .GDAXI, London's FTSE .FTSE and France's CAC .FCHI all down more than 1 percent.
MSCI world equity index .MIWD00000PUS was flat but has fallen about 9 percent so far in January -- its biggest monthly loss since late 2002.
Earlier, Japan's Nikkei .N225 managed to squeeze out a 1.9 percent gain on the day but ended the month down a whopping 11.2 percent -- its worst monthly performance in nearly 8 years.
OUTLOOK GRIM
Demand for less risky assets helped lift safe-haven government bonds, pushing the March Bund futures FGBLH8 up 50 ticks. The 10-year Bund yields EU10YT=RR eased to 3.95 percent, while the U.S. 10-year yield US10YT=RR was at 3.63 percent.
In the currency market, the dollar steadied from declines in reaction to the Fed rate cut, rising 0.1 percent against a basket of major currencies .DXY, benefiting from repatriation flows as investors ditched risky investments.
But U.S. crude CLc1 fell more than $1 towards $91 a barrel on worries that heavier financial losses would drain the U.S. economy and hurt demand at a time when inventories of crude and gasoline are rising quickly.
Copper MCU3 drew some support from the Fed rate cut and was steady on the London Metal Exchange, while gold XAU= traded in a slim range around $923 an ounce, taking a breather after rising to an all-time high of $933.10 on Tuesday.
The fact that the Fed had lowered rates by 125 basis points in nine days was not grounds for optimism, but a sign of a really grim outlook, said Martin McMahon, FX strategist at Credit Suisse in Zurich.
Euro zone data showing inflation rising to an all-time high in January and economic sentiment plunging to two-year lows underscored the negative global outlook. This followed figures showing U.S. economic growth slowed abruptly in the fourth quarter to its most sluggish in five years.
Markets are pricing in more U.S. rate cuts, giving a 50/50 chance the next move by the Fed will be either a 25 basis point or 50 basis point reduction. FEDWATCH
"We're going to tread a bumpy path for the next several months, until the market gets more comfortable with the uncertainties it is facing now," said Stephen Dowds, head of International Equities at Northern Trust.
