World stocks hovered around two-year lows on Wednesday with losses in Europe and Japan while oil climbed for the third day in a row and the dollar slipped back from recent highs. Wall Street looked set for losses at the open. Earnings concerns, worries about banking stress, Western tensions with Russia over Georgia and a gloomy outlook for the world economy all weighed on sentiment. The euro gained half a cent on the dollar after European Central Bank Governing Council member Axel Weber said talk of a euro zone interest rate cut was premature. With little specific to drive equities on Wednesday, one Japanese stock analyst said his market was simply being “pulled down by gravity”. MSCI's main gauge of world stocks was up slightly as emerging market shares firmed, but still trading around a two-year low. It has lost more than 17 percent so far this year, on track for one of its worst annual performances in more than 20 years. European shares fell as weaker banking stocks outweighed the impact of energy shares that gained on a rise in crude prices. The FTSEurofirst index of pan-European shares was down 0.7 percent having gained 0.2 percent in the previous session. “It's a difficult environment for the banking sector,” said Henk Potts, equity strategist at Barclays Stockbrokers. “Financials have been under pressure due to concerns about the speed of the economic slowdown and worries that there is still further fallout from the subprime credit crunch issues.” Societe Generale noted that troubles at US mortgage agencies Freddie Mac and Fannie Mae were a threat to US commercial banks, which it estimated hold some $1 trillion in the agencies' debt, or 9 percent of the banks' balance sheets. Earlier, Japan's Nikkei average dipped 0.2 percent, led lower by exporters such as Honda and property shares which dropped after the collapse of another builder. Sohken Homes filed for protection from creditors with 33.8 billion yen ($308 million) in debt, the latest in a string of collapses in the property and construction sectors. Barclays' Potts said stock investors were still concerned about the high price of oil and its effect on inflation and sentiment despite the price of crude now being well off its recent, all-time highs. Oil rose for a third straight session, above $117 a barrel, on worries that Tropical Storm Gustav will threaten oil and natural gas installations in the Gulf of Mexico. Crude for October delivery rose $1.09 to $117.36 a barrel, after settling up $1.16 on Tuesday. Gustav was downgraded to a tropical storm on Wednesday after it slammed into Haiti on Tuesday, but forecasters expect wind speeds to regain hurricane force, and it could be the first major storm to threaten oil and gas production in the Gulf of Mexico since 2005. The euro and yields on euro zone government bonds rose to session highs after Bloomberg quoted the ECB's Weber as saying talk of an interest rate cut is “premature”. “The market became too confident that rate cuts were on the card,” said a bond trader in London. Weber, widely considered to be among the most ‘hawkish' and influential of ECB policymakers, said there is no scope for rate cuts and hinted that there might even be room to raise them if the economic outlook improved toward the end of the year. The euro jumped on the headlines and was up three-quarters of a percent at around $1.4756.The dollar index, a measure of the greenback's value against six major currencies, fell 0.8 percent on the day to 76.76, having hit a 2008 high on Tuesday at 77.619.
