Sterling fall as Northern Rock Woes Deepen

Asian and European stocks fell on Monday while sterling hit a one-year low as concerns over financing for banks grew after UK mortgage lender Northern Rock tapped the Bank of England for an emergency loan last week.

Safe-haven government bonds rose as a result, while the dollar held near last week's 15-year low against major currencies ahead of an expected U.S. interest rate cut this
week. The Northern Rock woes are fanning concerns that more financial institutions may have been hit by high interbank lending rates even though money markets have showed signs of stabilizing.

The recent rise in interbank lending rates could also squeeze corporate and other borrowers, which would in turn weigh on companies' profits and slow consumer spending.”The current Northern Rock situation will put a renewed focus on a link between consumption and housing. There will be tighter lending standards in the next 12 months at a time when the leverage is at a record high," said Michael Metcalfe, senior strategist at State Street. “In certain areas of the global economy like in the U.S. and UK it will be remarkable if we didn't get a sharp slowdown in consumption."

The MSCI main world equity index was down 0.5 percent, while the FTSEurofirst 300 index fell more than 1.2 percent on the day. Northern Rock shares fell more than 30 percent, adding to their 32 percent plunge on Friday. Other UK mortgage lenders fell across the board, while French banks were also hit. Credit concerns also hit Asian shares, halting four straight weeks of gains. MSCI's measure of Asian stocks excluding Japan fell 0.8 percent. Japanese markets were closed for a public holiday.

Sterling fell to its lowest since October 2006 on a trade-weighted basis and hit a new 14-month low versus the Euro. The dollar held off its 15-year low against a basket of
major currencies ahead of the Federal Reserve's monetary policy meeting outcome on Tuesday. Investors expect the Fed to cut interest rates by as much as 50 bps from the current 5.25 percent. Money markets stabilized further despite the turmoil in stock markets. Three-month sterling deposit rates hit a three-week low of 6.58 percent, according to prices indicated on Reuters .