LONDON (Reuters) - World stocks hit a two-week low on Thursday while the dollar remained vulnerable near the previous day’s record lows as Wall Street tumbled on a fresh series of negative news on the U.S. mortgage and financial industry.
U.S. stocks, after tumbling three percent on Wednesday, were set for a weak open. European shares cut losses after BHP Billiton confirmed market speculation it had approached rival Rio Tinto about a possible combination.
Oil resumed its march towards $100 a barrel, while gold rose towards the previous day’s 28-year peak.
Credit concerns intensified on Wednesday after a probe of the home loan industry drew in top U.S. mortgage finance firms. Washington Mutual <WM.N, the largest U.S. savings and loan company, warned the housing slump will extend into 2008.
Furthermore, Morgan Stanley said it suffered a $3.7 billion loss from its U.S. subprime exposure while General Motors posted its largest quarterly net loss ever.
The credit crunch of the past three months, stemming from the fallout in U.S. subprime mortgages, has hit consumer sentiment and threatened to weaken corporate profits and derail growth in the world’s largest economy.
Strength in gold and oil prices are also fanning inflation concerns, which are negative for risky assets.
“The major fears are concentrated in two areas: the inflation threat from higher commodity prices and the fact that there’s a lack of credibility in the banks’ reports,” said Alain Bokobza, head of strategy at Societe Generale in Paris.
MSCI’s main world equity index was down 0.7 percent, having earlier hit the two-week low. The index, however, is still up 11 percent since January and not so far away from last week’s record high.
The FTSEurofirst 300 index was down 0.5 percent, limiting losses after BHP/Rio Tinto news.
Shares in Rio Tinto surged had risen more than 20 percent at one point, while BHP shares rose more than 3 percent. BHP said Rio Tinto rejected its approach.
U.S. stock futures were down around 0.1 percent.
Asian stocks on a MSCI measure fell three percent while emerging stocks fell 2 percent.
The dollar traded at $1.4662 per euro after hitting record lows of $1.4730 on Wednesday. It also held close to all-time troughs against a basket of major currencies.
Expectations for further U.S. interest rate cuts from the current 4.5 percent have weighed on the dollar.
The Bank of England and European Central Bank announce their rate decisions on Thursday. Both central banks are expected to hold rates steady, at 5.75 and 4.0 percent respectively.
The iTraxx Crossover index, the most widely watched indicator for European credit market sentiment, widened slightly to 367 bps. Emerging sovereign spreads widened 3 bps. The December Bund future was up 6 ticks, having hit a two-month high earlier.
U.S. light crude was erased earlier losses to stand up 0.8 percent at $97.14 a barrel. Oil surged towards $99 for the first time in the previous session.
“More and more investor money has flowed in to commodities as the dollar has continued to weaken. These flows have reinforced the on again-off again negative correlation between oil and the dollar,” JP Morgan said in a note to clients.
Gold stood at $832.80 an ounce, after hitting $845.40, its highest in nearly three decades, on Wednesday.
Gold is up more than 30 percent on the year and has soared since the trouble took root in U.S. credit markets, with the metal variously seen as an inflation hedge or a safe haven in all the turmoil.