Stocks shaken down on recession fear

The yen and gold prices rose, while government bonds also climbed in a fresh bid to unload risk on the reality of recession despite trillions of dollars pledged to recapitalise banks and stem the worst financial crisis since the 1930s.

The FTSEurofirst 300 index of top leading shares fell 2.6 percent, while Germany's DAX and Britain's FTSE both shed more than 2 percent.

MSCI's main world stock index was down more than 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.

The recessionary fear was also reflected in MSCI's measure of Asian stock markets excluding Japan, which slid 3.3 percent. Japan's Nikkei, however, rose 1.1 percent after spending most of the session in negative territory.

US stock futures pointed to a weaker Wall Street open, but pared losses after JP Morgan reported Q3 net income equating to $0.11 per share and reported net markdowns of $3.6 billion.

REAL ECONOMY BITES

Governments around the world have announced plans to rescue their banking sectors and kick-start interbank lending, with the United States on Tuesday saying it would inject $250 billion into its banks, including the nation's top nine lenders.

But analysts say now the fears of an imminent financial meltdown have given way to economic worries, taking risk-averse investors back to the yen, which saw a stunning rise last week as panic descended ahead of the bailouts and coordinated central bank rate cuts.

‘Governments have done as much as they can to deal with the banking crisis. The fires have been put out for now, so panic buying in the yen that we saw last week has subsided,’ said Kikuko Takeda, senior currency economist at BTM UFJ.

‘But with European shares falling today, it's not surprising that yen support is continuing,’ she said, adding that more bad news about the banking sector would be seen as a cue to buy more yen.

The dollar fell 0.7 percent to 101.43 yen, retreating further from around 103 yen hit on Tuesday and keeping the pair within range of 97.88 yen hit last week for the first time since mid-March, according to Reuters data.

The dollar stayed weak after Federal Reserve Bank of San Francisco Janet Yellen on Tuesday said the economy ‘appears to be in a recession’.

A raft of economic figures due later in the day may support that view. The Federal Reserve will release its Beige Book summary of economic conditions at 1800 GMT. Before that sees the New York Fed's manufacturing poll for October, as well as figures for retail sales and wholesale prices.

The euro fell 0.4 percent to 138.64 yen. The single currency

was up 0.3 percent against the dollar at $1.3668.

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 gummed up after the collapse of Lehman Brothers last month.

The interbank cost of borrowing dollars, euros and sterling fell across all maturities, the latest daily fixing from the British Bankers' Association showed.

‘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.

Weakness in equity markets helped fuel demand for government bonds, driving yields lower. The euro zone 10-year bond yield slipped more than 2 basis points to 4.111 percent, while the US 10-year yield eased 6.8 basis points to 4.0169 percent.

Meanwhile, US crude plumbed a fresh one-year low of $76.05 a barrel, 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 $846.35 an ounce.