Stimulus fears haunt world share markets, dollar weak

By Richard Hubbard

LONDON (Reuters) - World share markets looked vulnerable to further falls on Friday, with brighter economic news from Europe doing little to encourage investors who are worried that central bank stimulus may be curtailed.

MSCI's world equity index, which shed 1.4 percent for its second biggest daily loss of the year on Thursday, was virtually unchanged, with losses in Europe cancelling out a rise of nearly one percent in Japan's turbulent Nikkei.

U.S. share indexes pointed to Wall Street opening lower as well, although fresh data on orders for durable goods in April due at 1230 GMT may influence their direction.

Activity across all the markets was also limited by the approach of a long weekend in Britain and the United States, with few investors willing to build fresh positions.

However, many market analysts see the risk of further falls ahead, especially in stock markets.

"I think people want to cash in, particularly in May of all months which has been a tremendous month," said Alastair Winter, chief economist at Daniel Stewart.

Equity markets have hit their highest levels in years over the past few weeks on the back of huge stimulus measures by the Fed and other central banks, despite little convincing evidence of strong growth in the world economy. The gains have made many investors sensitive to any signs the liquidity surge could slow.

"It's gone too far really, and I think we'll see more selling," Winter said.

Fears that Fed chairman Ben Bernanke was preparing the ground for an early tapering back in the bank's $85 billion a month bond purchases sparked a sharp rise in volatility across the world's financial markets on Thursday.

That sell-off was concentrated in Japan's stock market which suffered its biggest one-day percentage drop in two years, but also rattled European and U.S. markets and sent the yen to near two-week highs against the dollar.

Japanese shares have gained nearly 70 percent in the last six months on the back of Japanese Prime Minister Shinzo Abe's prescription of aggressive monetary and fiscal stimulus.

"The fact the market has had such a huge run over a relatively short period has left it incredibly vulnerable," said Shane Oliver, strategist at AMP Capital.

GERMAN STRENGTH

Europe's broad FTSE Eurofirst 300 index fell again on Friday, declining 0.5 percent after posting its biggest one-day fall in nearly 12 months in the previous session. Share indices for Germany, the UK and France were also up to 0.9 percent lower.

Although a key business survey showed sentiment in Germany was better than expected, this only served to dampen expectations the European Central Bank would soon cut rates.

The Ifo survey found optimism over the economic outlook in Europe's largest economy may be improving. A view reinforced by earlier data on German consumer sentiment.

The euro rose to hit a day's high of $1.2987 after the Ifo survey, closing on this week's peak of $1.2998 and the mid-May high of $1.3030.

"The euro has rebounded on the back of the Ifo data. There were a lot of expectations that the ECB could do more easing and some positive data surprises have taken the pressure off," said Ian Stannard, head of European FX strategy at Morgan Stanley.

The data, which suggests the German economy is slowly picking up speed after a sluggish first quarter, initially also sent German Bund futures to a two-month low. However, the trend reversed when the profit-taking in equities spread to the euro zone peripheral bond markets.

Meanwhile the dollar index, which measures the currency's value against a basket of currencies, remains weak. It was down 0.3 percent at 83.56, off a three-year high of 84.498 hit on Thursday.

The greenback's weakness had little impact on commodity markets which are still taking their cue from this week's Chinese factory data pointing to slower industrial demand from the world's second largest economy.

Oil was on course to post its biggest weekly loss in more than a month, with Brent edging down towards $102 per barrel on Friday. U.S. crude inched down 66 cents to $93.60 a barrel, with both market gauges on track for a more than 2 percent drop this week.

(Additional reporting by Jessica Mortimer.; Editing by)