Global stocks tumble on US stimulus watch

Fear that the US Federal Reserve will scale back its stimulus as the economy recovers drove world stock markets down for a second straight day on Tuesday, with Europe taking its worst hit since August, while Treasury prices rose modestly.

Investors expect the Fed to start paring its $85 billion-a-month programme if Friday's US jobs report for November shows encouraging growth. Many think a cut-back could come in March, though some expect it by January, after US data on Monday pointed to steadying growth.

"It's not a question of if, it's a question of when, and you always have the question of how much of it is real and how much of it is emotional in nature?" said Gordon Charlop, managing director at Rosenblatt Securities in New York.

Gold, which like stocks has been a key beneficiary of the US stimulus due to inflationary concerns, traded not far from Monday's near 5-month low. Oil approached a 3-month high as the US recovery boosted the demand outlook for energy amid supply outages in Libya.

The dollar slipped against the yen as investors took profits from a month-long rally in the currency driven by speculation of an imminent reduction in the Fed stimulus.

US stocks opened lower, putting the S&P 500 on track for a third consecutive decline.

The Dow Jones industrial average was down 100.89 points, or 0.63 per cent, at 15,907.88. The Standard & Poor's 500 Index .SPX was down 7.52 points, or 0.42 per cent, at 1,793.38. The Nasdaq Composite Index was down 8.43 points, or 0.21 per cent, at 4,036.83.

US Treasuries prices edged higher, with the benchmark 10-year US Treasury note up 9/32, its yield at 2.7662 per cent.

European shares were rattled for the second day, with Paris's CAC 40 sinking 2 per cent, and the pan-regional FTSEurofirst down 1.4 per cent in its weakest day since August.

New fears over Europe surfaced as the cost of insuring Ukraine's government debt against default jumped, leaving it a whisker from 2009 peak levels.

Political worries also clouded markets as President Viktor Yanukovich left Ukraine for a state visit to China, amid protests about his decision to abandon an EU integration pact.

Outside Ukraine, investors reacted well to a debt swap by Portugal aimed at getting it in shape for a possible return to borrowing markets next year. Portugal's bonds and stocks outperformed.

"Portuguese bonds are actually posting a rally, reflecting the fact that after this morning's exchange, next year's funding is going to be less challenging," said Luca Cazzulani, strategist at UniCredit said.

MSCI's world stock index, which tracks 45 countries, was down 0.57 per cent, supported by early gains in Asia. News of Japan's potential stimulus widening had lifted the Nikkei toward a 6-year high.

The European Central Bank and Bank of England both meet on Thursday, with the ECB in particular focus after last month's surprise interest rate cut.

The euro edged up to just over $1.3585 and was at a 5-year high versus the yen. The yen tumbled against both the euro and dollar on Monday after Reuters reported exclusively that the Bank of Japan was looking to expand its $70-billion-a-month stimulus.

The Australian dollar dropped toward a 3-month low after the Reserve Bank of Australia left rates on hold and said the currency was still uncomfortably high.

Spot gold rebounded to above $1,223 an ounce while remaining close to the early July low hit on Monday.

Benchmark Brent crude rose nearly 1 per cent to near $112.50 a barrel. US crude prices rose 2.2 per cent to $95.90.