GLOBAL MARKETS-Stocks fall, dollar firm before US election

Mon Nov 5, 2012 4:24pm GMT

* U.S., European shares fall on investor caution

* Dollar index touches 2-month highs on safety bids

* U.S. presidential race tight before Tuesday vote

* Eyes also on Chinese leadership, euro zone debt crisis

By Richard Leong

NEW YORK, Nov 5 (Reuters) - World stocks fell and the dollar firmed on Monday as investors moved to the sidelines or favored low-risk assets before Americans choose their president, China starts a leadership transition and Greece faces a fraught vote to secure fresh rescue funds.

Investors are nervous over whether the world's biggest economy will avert a shock as Washington will contend with an automatic $600 billion in spending cuts and tax hikes at year end -- known as the "fiscal cliff" -- after the presidential contest.

World leaders at the G20 summit this weekend in Mexico City pressed the United States to act decisively on the tax and spending issues.

"People are pausing ahead of the election and what that means for the fiscal cliff," said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis.

Opinion polls show the race between President Barack Obama and Republican challenger Mitt Romney remains neck-and-neck at the start of the last day of campaigning, and the uncertainty over the outcome left financial markets jittery.

Safe-haven bids pushed the U.S. dollar up 0.2 percent to two-month highs against a basket of major currencies and German two-year government bond yields dropped below zero for the first time in two months on safe-haven demand.

In late morning trading, the Dow Jones industrial average was down 8.56 points, or 0.07 percent, at 13,084.60. The Standard & Poor's 500 Index was down 0.45 points, or 0.03 percent, at 1,413.75. The Nasdaq Composite Index was up 8.92 points, or 0.30 percent, at 2,991.05.

European shares were down 0.5 percent, having ended the previous week at a two-week high.

The MSCI world shares index was 0.5 percent lower as Tokyo's Nikkei index closed 0.5 percent weaker following Friday's Wall Street sell-off.

Benchmark U.S. 10-year Treasury notes were up 10/32 in price, yielding 1.6823 percent, down 3 basis points from late on Fr iday.

In commodity markets, Brent crude oil turned higher, erasing early losses. December Brent futures last traded up 26 cents at $105.95 a barrel after they were bogged down earlier by a strong dollar and a drop in demand in the wake of Sandy, the deadly storm that pummeled the U.S. Northeast a week ago.

Sandy disrupted the distribution of gasoline and left millions without power in the region.

In line with the broader market caution, gold gained about 0.4 percent at $1,683.10 after Friday's 2 percent plunge.

BEYOND U.S. ELECTION

While monitoring on the outcome of the tight race for the White House, investors were mindful of the leadership transition in China and developments in the euro zone debt crisis and their impact on the global economy.

It was expected that Greek Prime Minister Antonis Samaras' coalition will muster enough support on Wednesday to win a vote on structural reforms and a follow-up vote on Sunday on an austerity budget for 2013. These fiscal reforms are critical for the debt-laden nation to receive more financial aid from lenders.

"The concern remains the euro debt crisis and the continuing problems regarding Greece," said Matthew Lifson, senior trader and analyst at Cambridge Mercantile Group in Princeton, New Jersey.

On Thursday, China's ruling Communist party will begin the 18th congress in its history with the culmination a week later in the expected selection of Xi Jinping to succeed President Hu Jintao.