World stocks sank towards 14-year lows in a broad-based sell off on Monday, dragged lower in Europe and Asia by economic gloom and worries about the US banking system. Wall Street looked set to join in the decline. Japan recorded its largest current account deficit on record, underlining the economic headwinds that continue to buffet investors. MSCI's all-country world stock index was down 1.2 percent, bringing year-to-date losses to around 24 percent. The index, a benchmark for major investors, is only a few percentage points away from lows reached in 1995, before that decade's Russian and Asian crises. “The recession is very dire. You have an incredible rise in risk premium so people expect the worst. Banking results are getting worse,” said Giorgio Radaelli, chief strategist at wealth manager BSI in Switzerland. Investors remain particularly concerned about the banking sector, with uncertainty about the potential nationalisation of U.S. banks weighing hard. European shares fell, with the pan-European FTSEurofirst 300 index of top shares down 2.3 percent. The broader STOXX 600 was also down 2.4 percent, hitting its lowest level since September 1996. Earlier, Japan's Nikkei average fell 1.2 percent to a 26-year closing low. The broader Topix slipped 1.5 percent to a fresh 25-year low. Export giant Japan's current account balance swung to its largest deficit on record in January, with the income surplus tumbling about a third from a year earlier. It was the first deficit in 13 years. Britain's FTSE 100 dropped 1.8 percent to a six-year low by midday Monday as bank stocks tumbled on investor concern about the fragile financial sector, outweighing gains in energy and pharmaceuticals. By 1120 GMT, the FTSE 100 was down 63.80 points at 3,466.93 points, after touching its lowest point in six years. The index had risen 0.87 points on Friday. Banks were the biggest losers in Britain's top share index, as investors continued to flee the financial sector following news of further government stake-building. Lloyds Banking Group shares tumbled 8.3 percent as the bank starts meeting investors to garner support to insure £260 billion ($370 billion) of risky assets with the British government, which will get a stake of up to 77 percent in the bank. Analysts said the financial sector is also being pressured by the worsening economic climate. “As we move through the recession to more traditional bad loan impairments coming through, the Lloyds story has been rather a knock-back for the banking sector,” said Richard Hunter, head of UK equities at Hargreaves Landsdown. Lloyds said Britain's requirement for banks to hold enough capital to withstand a “severe” downturn was key to its decision, raising alarm about more stringent requirements being imposed, which was seen as negative for Barclays. Barclays was the biggest faller on the blue-chip index, down 10.7 percent. HSBC shares fell 9.9 percent, after short sellers dumped the stock in anticipation of buying back after brokers said the bank could complete its $17.7 billion rights issue. Other banks were also down, with Royal Bank of Scotland falling 9.0 percent, while Barclays and Standard Chartered lost 8.6 and 8.4 percent respectively. The UK banking index is down 8 percent and has tumbled almost 50 percent this year after slumping by 57 percent in 2008. Bank of England Deputy Governor Charles Bean said the central bank has scope to pump more money into the economy if an asset-buying spree unveiled last week failed to kickstart Britain's recession-hit economy. The Bank of England cut interest rates to a historic low of 0.5 percent last week and admitted it had pushed conventional monetary policy to its limit. Meanwhile, the White House's chief economic adviser Larry Summers said world leaders need to pump more money into the economy in a coordinated effort to boost demand and pull the world out of recession. Oil and gas producers added the most points to the index, supported by crude prices gaining ground and pushing above $46 a barrel. Tullow Oil added 5.9 percent after it said it had made a significant new discovery offshore Ghana and secured a $2 billion loans package to develop the finds. Heavyweights Royal Dutch Shell and BP also gained ground. Defensive pharmaceuticals stocks were also in positive territory as investors looked to assets perceived as relatively safe amid the gloomy economic outlook. AstraZeneca added 4.7 percent after news of a planned Merck and Schering-Plough deal, while Shire and GlaxoSmithKline gained 2.8 and 0.7 percent respectively. However, miners were a standout faller on the UK index as the falling copper price hit miners.
