Weak Ifo drives global stocks to near 2-year low

By Natsuko Waki Tue Aug 26, 6:27 AM ET

LONDON (Reuters) - World stocks hit their lowest level in almost two years on Tuesday as a worsening German business mood and fresh concerns about financial firms triggered a sell-off in risky assets, lifting the dollar to a 2008 high.

The Munich-based Ifo economic research institute said its business climate index fell to 94.8 this month from 97.5 in July, worse than the 97.1 consensus forecast, adding to growing evidence that growth outside the United States is deteriorating and accelerating the euro's tumble.

"The data should be considered dramatic," said Folker Hellmeyer, economist at Bremer Landesbank.

"I expect the global slowdown will continue and affect Germany significantly more than has been reflected in forecasts up to now."

Investors had no shortage of grim news from the financial sector, with JP Morgan saying the market value of its investments in preferred stock of U.S. mortgage lenders Fannie Mae and Freddie Mac has halved this quarter.

Hopes for South Korean investment in Lehman Brothers took a hit after the country's top regulator voiced concern on Monday about a state-run lender's interest in the bank.

U.S. regulators closed Columbian Bank and Trust on Friday, the ninth U.S. bank to fail this year as the weakening economy and falling home prices take their toll on financial firms.

While the epicenter of the one-year-old credit crisis lies in the United States, investors eyed worsening growth elsewhere, which benefited the dollar across the board at the expense of high-yielding peers such as the Australian dollar.

"Problems in the U.S. financial market are leading to equity market weakness which is the principal driver hitting the high- yielding currencies," said Daragh Maher, deputy head of global foreign exchange research at Calyon.

The FTSEurofirst 300 index fell 1.3 percent while the MSCI main world equity index fell 1 percent to its lowest since September 2006, bringing year-to-date losses to more than 18 percent.

The September Bund future jumped to stand 26 ticks higher on the day, following the weak Ifo survey.

DOLLAR RALLIES

The dollar rose to a 2008 high against a basket of major currencies while it briefly hit a new six-month high beyond $1.46 per euro. Sterling fell to a two-year low below $1.84.

The high-yielding Australian and New Zealand dollars fell more than 1 percent against the U.S. currency.

The greenback has been garnering support from expectations that growth outside the United States is deteriorating. The euro zone and Japan have already moved halfway into recession after their economies contracted in the second quarter while the UK economy failed to grow at all in the same period.

A G20 finance official told Reuters on Monday that the International Monetary Fund has trimmed its world economic growth forecasts for this year and next, largely due to a marked worsening in its outlook for the euro zone.

Emerging sovereign spreads widened 1 basis point while emerging stocks fell 1.1 percent on the day.

U.S. light crude fell 0.3 percent to $114.73 a barrel, but the downside was limited due to supply concerns from tropical storm Gustav in the Caribbean.

Gold fell to $819.00 an ounce.

(Editing by Stephen Nisbet)