Stocks, credit and dollar hit by subprime woes

LONDON (Reuters) - World stocks fell on Tuesday from this week's record high while the credit market and dollar weakened, hit by fresh concerns that troubles in the risky end of the U.S. mortgage sector could spread to the wider economy.

Turmoil in the U.S. subprime market, which caters to borrowers with poor credit histories and represents around a fifth of total U.S. annual mortgage lending, has haunted investors intermittently since early this year.

The latest upset started after the benchmark ABX subprime mortgage index, used by investors to insure against risks in the sector, hit record lows on Monday.

This rekindled worries a subprime fallout could threaten banks with bad debts, raise borrowing costs and hurt corporate earnings -- which would also retrench consumer spending.

"These troubles in the subprime market are inexorable. They progress slowly and the consequences could vary from a tightening of the credit market and a soft landing by the U.S. economy to a much gloomier scenario of the collapse of a financial group," said Pierre-Yves Gauthier, strategist at Oddo Securities.

The MSCI world equity index was down 0.2 percent on the day. It was only Monday when the index hit a lifetime peak.

The pan-European FTSEurofirst 300 index .FTEU3 fell 0.7 percent, off last week's 6-1/2 year peak. MSCI's Asian share index ex-Japan was up 0.3 percent. U.S. stock futures were pointing to a weaker start on Wall Street.

The iTraxx Crossover index, a barometer of European credit sentiment, widened 10 basis points to 285.5. The index burst above 300 bps last week, levels not seen for a year. The index's volatility is up 36 percent on the month.

"There's still a lot of fear in the market," a credit trader said.

Credit market volatility prompted Russian state-controlled oil firm Rosneft (ROSN.MM) to postpone its planned multi-billion dollar bond offering late on Monday.

Plans to raise more than 1 billion euros for Dutch retailer Maxeda DIY, partly owned by private equity firm KKR, were also cancelled on Monday. Maxeda is Europe's first leveraged loan to be put on ice in the current market correction.

"This, after failing to entice investors by reducing prices for the debt and introducing covenants to restrict future borrowing, signals the growing wariness amongst investors with respect to high yield debt," BNP Paribas said in a note.

"Once investors start demanding a higher premium, financing will become more expensive and deal making difficult."

BONDS BID, DOLLAR DOWN

Safe-haven bonds climbed, with the September Bund future up 30 ticks. Spreads on interest rates swaps, a gauge of risk appetite, widened, with yield premiums on 10-year swaps over Treasuries climbing to 66 basis points, close to last week's four-year high.

The dollar hit a 26-year low beyond $2.045 per sterling after above-forecast UK inflation data cemented expectations of higher British interest rates, contrasting with the view that the next move in U.S. rates would be a cut.

Traders are pricing in a roughly 66 percent chance of the Fed trimming rates in 2008, up from around 35 percent on Friday -- a damaging prospect for the dollar in a market which has rewarded currencies with higher or rising interest rates.

The euro steadied at $1.3772, just below last week's all-time highs, erasing gains after a bigger-than-expected drop in the German ZEW investor survey.

The Fed remains concerned that inflation might not moderate, a risk that Chairman Ben Bernanke is expected to highlight in his testimony to Congress later this week.

Oil prices eased on Tuesday but still held within sight of record highs. London Brent crude was down 0.3 percent at $76.08 a barrel, off the previous day's 11-month high. Gold was down at $662.90.