Global Markets: Fears hobble stocks

* Morgan Stanley adds to growth fears,cuts global GDP forecasts

* Swiss franc falls as central bank intervenes in currency market

* Flight to quality sends German Bunds to record highs

European shares followed Asian markets down as worries about the U.S. economy and dim prospects of a quick fix for the euro zone’s debt crisis led investors to lock in profits following this week’s rally.

The retreat in riskier assets buoyed gold and safe-haven government bonds,with German Bund futures hitting record peaks and benchmark U.S. Treasury yields falling to their lowest level in a week.

Adding to the glum economic picture,UK. retail sales grew at an unexpectedly slow pace in July.

Earlier,Morgan Stanley analysts became the latest to cut forecasts for global growth,citing recent policy errors in the United States and Europe,plus prospects of further fiscal tightening in 2012.

Deutsche Bank cut its projection for Chinese GDP growth to 8.9 percent for 2011 from 9.1 percent and to 8.3 percent for 2012 from 8.6 percent,largely reflecting a downgrade in export outlook due to slower growth in the United States and Europe.

European stocks fell 2 percent,wiping out the previous session’s gains.

At the start of the week,we were expecting a sell-off and it hadn’t materialised,with people selectively putting money into a few stocks keeping the froth alive,and so I think it is overdue,the head of institutional trading at a UK-based investment bank,said.

MSCI’s world equity index fell 1 percent while emerging stocks lost 1.5 percent.

U.S. equity futures pointed to a lower open on Wall Street after closing flat the pervious day following a gloomy sales outlook from tech bellwether Dell which fanned fears slow economic growth would crimp earnings in the third quarter.

SWISS TUG-OF-WAR

The Swiss franc fell against the euro and the dollar with traders saying the central bank was intervening in the forwards market in its bid to curb the currency’s strength.

The plight of the Swiss franc is part of a larger battle over Europe’s fiscal crisis,with the Swiss currency favoured by investors seeking safety in a currency other than the euro.

They (the SNB) have been in the fx swap market,said Chris Walker,currency strategist at UBS. But we think the euro/Swiss franc will still fall back towards parity.

The dollar is also being preferred as there are reports of funding stress and as a loss of risk appetite sees investors make a scramble for the dollar.

The euro last traded 0.2 percent up at 1.1422 francs while the dollar stood 0.5 percent firmer at 0.7941 francs .

The greenback also rose against commodity-linked currencies like the Australian dollar .

Defying the stronger U.S. dollar,spot gold gained 0.3 percent to $1,793.89 an ounce,just 1.1 percent shy of its all-time high of $1,813.79 struck last week.

In bond markets,German Bund futures rose as much as 87 ticks to a fresh year-high of 134.79 as the weak economic outlook and concerns EU policymakers were not doing enough to tackle the region’s debt crisis spurred the flight to quality.

U.S. Treasuries advanced,pushing the 10-year T-note yield about five basis points lower to a one-week low of 2.118 percent.

Brent crude futures fell 1.2 percent to $109.20 a barrel,as investors fretting over the euro zone’s debt woes and slower global growth tried to lock in profits from a rally in oil prices to their highest levels in nearly two weeks.