Security concerns weigh on stocks, boost bonds

LONDON, Mon Jul 2 -- Investors sold European stocks and bought government bonds as trading got underway for the second half of 2007 on Monday, driven by security concerns after weekend terror incidents in Britain and higher oil prices.
Lingering concerns about the impact of tightening credit on company profits -- ahead of an expected interest rate hike in Britain this week -- as well as worries about the U.S. high-risk mortgage sector also helped weigh on investor risk appetite.

Britain has raised its security rating to its highest level after failed car bombing attempts in London and an attack on a Scottish airport over the weekend.

"There's a little bit of ... risk premium in the market on these terror attempts in the UK and these are bringing a little flight to quality back to the market," said a European bank trader in Dusseldorf.

The FTSEurofirst 300 index (.FTEU3: Quote, Profile, Research) of top European shares was down 0.3 percent while London stocks (.FTSE: Quote, Profile, Research) were down a quarter percent. Airline stocks were lower, with the DJ Europe Stoxx travel & leisure index down 0.4 percent.

In the bond market, the September Bund future (FGBLU7: Quote, Profile, Research) was up 43 ticks.

CREDIT CONCERNS

Over the past week concerns had grown that credit problems in U.S. subprime mortgages could raise borrowing costs for companies, squeeze liquidity and spread to the world economy.

This helped ease risk appetite among investors who had pushed stocks to a record high earlier in June and drawn yen-funded capital into high-return assets.

The iTraxx Crossover, made up of 50 mostly junk-rated credits, widened to 236 basis points from around 227 in London on Friday, reflecting concerns about credit problems in the U.S. high-risk mortgage sector.

"There are still concerns about high oil prices and volatility in bond markets, and whether problems in the U.S. housing market will be contained there or spread to the wider economy," said Henk Potts, strategist at Barclays Stockbrokers.

"Eventually the effect of higher rates and credit will have to filter through with the potential for profits getting eroded."

The yen ticked higher as speculation grew that Japanese investors are repatriating cash from bond redemptions and coupon payments in the euro zone due this week which would be worth more than 40 billion euros.

London Brent crude rose 0.1 percent on the day to $71.50 a barrel, underpinned by falling gasoline and crude stocks in the United States and geopolitical supply risks stemming from security concerns in Britain.

Gold, traditionally seen as a safe haven asset, rose to $651.30 an ounce.