Credit woes crimp stocks as banks see declines

Credit crisis woes hit European stocks on Monday and looked set to at least hold back Wall Street after UBS, Credit Suisse and Citi signalled threats to their bottom lines.

The dollar sank to new lows early on but then recovered slightly.

Asia was a bright spot with Japanese stocks rising on an optimistic business survey. Emerging market stocks hit another record high.

The focus in Europe was on banks after UBS said it would write down 4 billion Swiss francs ($3.42 billion) in losses in its fixed income portfolio and elsewhere stemming from recent credit market tremors.

It will result in a third-quarter loss of 600-800 million Swiss francs, its first quarterly loss in nine years.

Rival Credit Suisse followed by saying its results would be adversely impacted by the credit market turmoil that said it would remain profitable in the third quarter.

Citi later said it expects a substantial decline in its third-quarter net income, somewhere around the 60 percent mark.

It definitely fuels ongoing worries on the markets. Credit spreads are widening again and the interbank (lending) market remains very tense, said Valerie Plagnol, chief strategist at CM-CIC Securities in Paris.

The FTSEurofirst 300 index of top European shares was down 0.3 percent and the Dow Jones European Stoxx Bank Index was down 0.9 percent

Investors have been balancing concerns about the impact of the credit crisis with an overall belief that the global economy is in decent shape.

Japan provided the second side of the story with the Nikkei average closing up 60.27 points at 16,845.96 after the Bank of Japan's tankan survey showed optimism. The tankan's headline diffusion index for big manufacturers' sentiment was plus 23, slightly above market forecasts.

DOLLAR, BONDS

The dollar hit new record lows against the euro and a basket of currencies in early trade in Monday but then rebounded as investors took profits.

Investors were focused on the U.S. Institute for Supply Management's manufacturing index due later in the session for further clues on the health of the U.S. economy and the direction of interest rates.

The euro was lower on the day at $1.4221, having pulled back from record highs above $1.4280 hit on electronic trading platform EBS earlier on Monday.

The dollar index, a gauge of the greenback's value against a basket of six major currencies, hit a record low of 77.657, before rebounding. The dollar index lost 3.8 percent in September, more than doubling its year-to-date fall.

Euro zone government bonds were softer.

The December Bund future was down 9 ticks at 112.57. The two-year Schatz yield was at 4.014 percent and the 10-year Bund yield was at 4.341 percent.

(Additional reporting by Blaise Robinson)