Global shares fall as recession fears take grip

LONDON (Reuters) - Shares across the world fell for the second straight day on Thursday, pummeled by signs the world's biggest economies were headed for recession after a month of financial sector turmoil.

European stocks fell 3 percent by midday after Wall Street and Japan's Nikkei both suffered their worst one-day losses since the stock market crash of 1987, and the MSCI World stock index traded 3 percent lower.

U.S. stock index futures were up 1 percent higher, suggesting a pause in the hemorrhaging even as Citigroup and Merrill Lynch posted big third quarter losses.

Oil fell $1.70 a barrel, trading at less than half the record high of $147 a barrel it hit in July, as fears of a sharp fall in demand took grip, and the dollar gained as risk-weary investors sold higher yielding currencies, unwinding carry trades.

Sharp equity gains on the first two days of the week were quickly forgotten after dismal U.S. retail sales and the Beige Book report underlined concerns about the economy. Federal Reserve Chairman Ben Bernanke said it faced a "significant threat" from credit markets.

"The whole cliche of Wall Street arriving on Main Street is so true now, with recession in the U.S., the UK, Europe and probably Japan, and significant slowing elsewhere," said Bernard McAlinden, strategist at NCB Stockbrokers in Dublin.

"Things have rapidly changed on the real economy and that has implications for earnings," he said.

Handset maker and technology bellwether Nokia, eyed for clues as to how a global financial crisis has hit consumer spending, posted results that were below analyst expectations. But its outlook soothed worried investors.

Bank bailouts by governments across the world and a concerted rate cut last week have helped started to unfreeze money markets, and Switzerland moved on Thursday to provide its two top banks -- Credit Suisse and UBS -- with billions of francs in emergency funding.

But any optimism about the stabilization in money markets has been swept aside, and reports are trickling in about sharp losses at hedge funds.

"I think today there is just a combination of uncertainty and deleveraging in the market," said Amar Gill, head of thematic research at CLSA in Singapore.

"International funds are pulling back and putting their money into whatever is safest: Treasuries or cash or paying off existing debt," he said.

Citadel Investment Group, one of the world's largest hedge funds, said September was the single worst month in the history of the company and warned of more volatility in weeks to come.

STEEP LOSSES

The credit market crisis that piled up losses at banks, froze interbank lending and slowed the economy, has taken the MSCI World index down 43 percent this year.

Benchmark emerging equities plunged 7 percent to their lowest since July 2005, and emerging sovereign debt spreads widened by 7 basis points to 587 basis points over U.S. Treasuries.

Ratings agency Standard & Poor's raised concerns over Ukraine, Hungary and Russia and Iceland's crown currency remained untraded internationally more than a week after its banking sector collapsed.

U.S. Treasury yields rose on Thursday on worries that the United States will have to boost debt issuance to help fund the government's massive bank rescue plan.

The 10-year government bonds yielded 4.0091 percent, up 6 basis points on the day.

The extent of recent equity falls has prompted talk of more rate cuts from the world's central banks.

"People said interest rates don't matter because credit markets are not working. Well, interest rates do matter because the economy is not working," said NCB's McAlinden, adding that he expected the Fed to cut later this month.

Fed fund futures show a 46 percent chance of a 50 basis point cut and a 54 percent chance of a 25 basis point cut.

(Additional reporting by Kevin Plumberg in Hong Kong and Peter Apps in London; Editing by Ron Askew)