GLOBAL MARKETS WEEKAHEAD-Investors wary, stocks at tipping point

By Natsuko Waki

LONDON, Aug 24 (Reuters) - With world stocks down 17 percent this year and the chances of breaking even in 2008 shrinking fast, investors will look this week to see if they hold above a key two-year low or subside further as global growth falters.

World stocks, measured by MSCI .MIWD00000PUS, hit their lowest level in almost two years last week as concerns intensified over the fate of U.S. mortgage firms and the health of major banks facing further asset-related writedowns.

In the case of Europe, if the market ends down on the month again, the pan-European FTSEurofirst 300 index .FTEU3 will have fallen for 9 out of the past 10 months.

Equity troubles come against a backdrop of sharp about turns in other major markets last week, that the next few days should demonstrate to be either renewed trends or mere blips.

What looked like an end to the sharp rally in oil and commodities might have proved a false dawn as crude oil jumped 6 percent last week and the Reuters-Jefferies CRB index of commodities futures .CRB making its biggest weekly gain since July 1975, feeding into inflation jitters.

And the dollar's August rally appeared to have lost momentum with the U.S. currency suffering its biggest one-day drop in five months against major currencies .DXY last Thursday.

Meanwhile, stock markets languish.

"Long-only equity managers are obviously struggling and they are in the red. You'd find it difficult to get back to the level pegging for the year," said Richard Batty, global investment strategist at Standard Life Investments in Edinburgh.

"We are fearful we are in a slow growth period ... That's why we favour cash and bonds over equities and property."

Earlier in August, oil's $30-plus tumble from its July record peak above $147 and a retreat in broader commodity prices had eased concerns over inflation, which discourage central banks from cutting interest rates to tackle economic slowdown.

This week's consumer inflation data from Germany, Italy and the United States might reflect some easing in price pressures.

U.S. GROWTH AND FED

Signs are afoot that some of the world's major economies may be in or close to recession -- technically defined as two consecutive quarters of negative growth. Japan and the euro zone's growth contracted in the second quarter, while the UK economy came to a standstill in the same period.

However, the United States is enjoying better growth than others, a factor which had triggered the dollar's rally earlier in August. Its Q2 growth is expected to be upgraded this week to 2.6 percent from 1.9 percent in the previous estimate.

Given that, investors have moved on to debate over when the U.S. Federal Reserve would remove policy accommodation it has put in place since the credit crisis first broke.

Tuesday's release of the minutes from the Fed's Aug. 5 meeting should give investors crucial pointers.

"The quid pro quo for slashing rates to avert a negative feedback loop between the financial sector and the real economy is an earlier than usual removal of the accommodation," said Ken Wattret, economist at BNP Paribas.

"If the current Fed is serious about avoiding an erosion of long-term inflation expectations it would be well advised to avoid the mistakes of 2004 onwards when policy stayed way too accommodative for way too long."

VALUATIONS AND PERFORMANCE

Valuation suggests that stocks have been relatively attractive for some weeks now.

According to Thomson Reuters data, the S&P 500 index .SPX is trading at 12.9 times forward earnings, after falling to as low as 11.63 in mid-July -- a level not seen since the fourth quarter of 1988 and below the long-term average of around 18.35 since 1968.

However, asset managers might be too traumatised to jump into an asset class which has fared badly.

"There has been a remarkable deterioration in the appetite for equities among institutional investors over the past two months," State Street said in a note to clients.

The financial services firm said the picture is clear in Japan, where monthly institutional flows into Japanese equities sank to a record low after being robust in the past few years.

For hedge funds, funds mixing various strategies such as long-short or relative value fared the worst so far this year.

The broader Lehman Brothers/HFN hedge fund composite index -- which tracks performance of nearly 2,400 hedge funds -- fell more than 2.6 percent in July, bringing the year-to-date loss to 4.26 percent.

July returns are slightly above the trailing 12-performance of -2.89 percent but still the weakest in the index's database going back to 2000.

The last episode of such hedge fund declines occurred following the August 1998 Russian default/LTCM debacle, when the Hedge Fund Review's composite hedge fund index lost 6.41 percent in the 12 months leading up to that September.

As of end-July, the index shows that funds with multi-style strategy suffering the worst loss of over 9 percent while macro/directional funds with trend-following strategy performing the best with a gain of 10.26 percent.

"Despite their tough performance over the past year, early 21st century investment doctrine has and will continue to favour the migration of assets from traditionally long-only styles to the absolute total return approach," Lehman said in a note.