Global stocks retreat as risk aversion returns

By Ian Chua

LONDON (Reuters) - Signs of renewed risk aversion surfaced on Wednesday with stocks pressured and gold rising as investors fret the global economy will not escape a recession even after bank bailouts, which have taken the edge off money market stress.

Oil prices held near a one-year trough below $80 set on Friday, while the yen and government bonds climbed as fears about an imminent financial meltdown gave way to economic worries after trillions of dollars were pledged to boost the banking system.

"The panic may have been removed from the market, and financial system meltdown may have be averted by the compendium of measures, but the outlook for earnings ... and the global economy continues to look grim," said Daragh Maher, deputy Head of global FX strategy at Calyon.

Fuelling those concerns was a disappointing outlook from PepsiCo Inc, especially given that soft drink- and snack-makers are usually seen as holding up in tough economic times.

European stocks fell in early trade, with the FTSEurofirst 300 index shedding 2 percent, while Germany's DAX and Britain's FTSE both shed more than 2 percent.

MSCI's main world stock index was down about 1 percent, as the two-day rebound from a five-year low fizzled.

"After the colossal gains achieved at the start of this week, it would seem that the hangover has kicked in and investors have sobered to the reality that recession is here," said Andrew Turnbull, senior sales manager at ODL Securities.

MSCI's measure of Asian stock markets excluding Japan slid 3.4 percent. Japan's Nikkei, however, rose 1.1 percent after spending most of the session in negative territory.

A recent slew of negative euro zone economic indicators including Tuesday's data showing a bigger-than-expected fall in German investor sentiment about the outlook for Europe's largest economy were starting to bite.

Anyone looking for relief is likely to be disappointed with U.S. retail sales data due later in the session expected to show a decline for a third straight month. Forecasts centered on a 0.7 percent fall.

MONEY MARKETS HEALING

Still, measures by governments and central banks aimed at restoring confidence between banks appeared to be helping to kick-start the healing process in money markets, which had literally gummed up after the collapse of Lehman Brothers last month.

Overnight dollar interbank rates were indicated at 1-1.5 percent, slightly below early Tuesday's level, although three-month dollar rates remained around early Tuesday levels, indicated in wider 3.5-5.4 percent range.

"The rescue packages around the world have laid the foundation for market confidence to return. However, experience has shown that confidence recovers only slowly," said Commerzbank analyst Antje Praefcke.

The yen benefited as investors turned risk averse. The dollar fell 0.9 percent to 101.29 yen, while the euro lost 1.2 percent to 137.70 yen.

Weakness in equity markets helped fuel demand for government bonds, driving yields lower. The euro zone 10-year bond yield slipped 3.5 basis points to 4.085 percent, while the U.S. 10-year yield eased 7.2 basis points to 4.013 percent.

Meanwhile, U.S. crude was little changed at $78.70 but not far off the one-year low of $77.09 a barrel plumbed on Friday, weighed by worries that a global recession would hurt demand.

Demand for gold, however, was firm, helping push the precious metal up more than 1 percent to $846.

(Additional reporting by Atul Prakash; Editing by Victoria Main)