Sterling, Stocks Tumble As Bank Crisis Deepens

Investors rushed to buy government bonds, sending two-year euro zone government bond yields to a record low.

Sterling hit fresh 7-1/2 year lows against the dollar and European shares tumbled again on Wednesday as fears intensified about the banking sector, knocking Barclays shares down more than 20 percent.

Investors rushed to buy government bonds, sending two-year euro zone government bond yields to a record low.

News that global miner BHP Billiton would cut 6,000 jobs and close a giant mine in Australia highlighted concerns that the credit crunch, well into its second year, is savaging the real economy and squeezing global demand for commodities.

Banking shares have been under pressure even as Britain launched a fresh bailout package this week to help its troubled banks.

"There's despair with regard to what's happening to the banking sector," Keith Bowman, analyst at Hargreaves Lansdown.

"With the huge threat of nationalisation on the horizon it's difficult for people to see a reason to be buying (banks), and on that basis it's one-way traffic in terms of trade." MSCI world equity index fell 0.8 percent, losing for the third consecutive day. The FTSEurofirst 300 index of leading European shares dropped 1.6 percent.

Shares in Barclays fell more than 20 percent to their lowest level since 1985.

U.S. stock futures were up around 0.6 percent, pointing to a firmer open on Wall Street a day after it registered a record Inauguration Day drop as Barack Obama took office as the new U.S. president.

Emerging stocks fell 1.4 percent.

STERLING SINKS

Sterling fell as low as $1.3716. On top of banking concerns, investors are worried the Bank of England will cut UK interest rates -- already at a record low of 1.5 percent -- even further to boost the economy.

Investors expect the BoE to cut again next month, by half a point, which would further dampen sterling's yield premium. But it could go much further.

Bank of England Governor Mervyn King said late on Tuesday that quantitative easing measures were now under consideration.

Such unconventional measures would take the form of the central bank buying a range of financial assets, thereby boosting the money supply and increasing available credit to companies, he said.

With the latest decline, sterling has lost around 7 percent against the dollar this week.

"The currency pair is neutral to slightly undervalued on most fundamental measures. As such, at current levels the currency pair is now at extreme and favourable levels for corporates who need to hedge medium to long term earnings," Bank of Scotland Treasury said in a note to clients.

The cost of insuring UK sovereign debt against default, shown on five-year Credit Default Swaps, widened to 143 basis points from below 100 two weeks earlier.

March Bund futures rose 44 ticks. The two-year euro zone government bond yield hit a historic low of 1.436 percent.

The premium that investors demand for buying less liquid European government debt over benchmark German bonds hit record highs partly due to fears about possible sovereign credit ratings downgrades.

The dollar fell 0.3 percent against a basket of major currencies. U.S. crude oil reversed earlier losses, gaining 1.3 percent at $41.36 a barrel.