Oil at new high as U.S. stocks slump

By Herbert Lash Reuters - Wednesday, May 7 06:18 pm

NEW YORK (Reuters) - Oil jumped to a record high for a third straight day on Wednesday, stoking inflation fears, while U.S. stocks fell as financial shares declined, even as European shares notched their highest close since mid-January.

Crude oil prices rose to a record near $123 a barrel, as heating oil futures shot up on data that showed distillate inventories fell, against forecasts for an increase.

The dollar gained, bolstered by comments from a Federal Reserve official that increased expectations among investors that the U.S. central bank's cycle of aggressive interest rate cuts may be nearing an end.

U.S. Treasury debt prices were narrowly mixed, as the market see-sawed, supported by economic data suggesting that inflation is in check for now but pressured by an upcoming $15 billion (7.7 billion pound) sale of 10-year securities.

European stocks were helped by a weaker euro and results at construction and technology groups that beat expectations.

U.S. and European equity markets got an initial lift from U.S. government data that showed higher-than-expected worker productivity gains and a lower-than-expected rise in unit labour costs, soothing some inflation fears.

But pending U.S. home sales fell in March, as expected, providing little upside for investors.

"There's little conviction among investors about how long the economy stays weak," said Joseph Battipaglia, market strategist at Stifel Nicolaus, Yardley, Pennsylvania.

"If you're not convinced we'll come roaring out of this in the second half, you're going to be hesitant to commit more capital to the market, and that's why you'll trade in a range," he said.

The Dow Jones industrial average fell 59.76 points, or 0.46 percent, at 12,961.07. The Standard & Poor's 500 Index fell 7.07 points, or 0.50 percent, at 1,411.19. The Nasdaq Composite Index fell 7.94 points, or 0.32 percent, at 2,475.37.

In Europe, the pan-European FTSEurofirst 300 index rose 0.8 percent at 1,362.11 points, its highest point since mid-January.

The technology sector was the best performer in Europe after Cisco Systems , the largest U.S. maker of routers and switches that direct Internet traffic, reported better-than-expected quarterly results late on Tuesday.

Nokia , Ericsson and ASML gained about 4 percent.

Strong profits at French cement maker Lafarge lifted constructions stocks.

"The earnings newsflow has not been as poor as had been expected, which has also been a bit of a support," said Mike Lenhoff, chief strategist at Brewin Dolphin.

In the commodities market, oil fell a touch after figures from the U.S. Energy Information Administration showed crude oil inventories rose 5.7 million barrels last week, more than analysts' consensus estimates of 1.6 million barrel increase.

But distillate inventories, including heating fuel and diesel, dropped by 100,000 barrels to 105.7 million barrels, against analysts' expectation of an 800,000 barrel increase.

"Traders were trying to comb the EIA data for any bullish feature and they found it in distillates," Jim Ritterbusch, president of Ritterbusch & Associates, said.

Traders also remained concerned about supply disruptions in Nigeria. Also, concerns surfaced over supplies from Iran, the world's No. 4 oil producer, when Tehran earlier this week said it would refuse nuclear inspections.

U.S. light sweet crude oil was off 6 cents at $121.78 per barrel after setting a new high at $122.81. London Brent crude set a record high of $121.47, and was up 35 cents at $120.66.

The dollar gained, bolstered by comments by Kansas City Fed President Thomas Hoenig late on Tuesday that rates will need to be raised in a timely way as the central bank grapples with a serious threat of inflation.

The euro fell on reports showing euro zone retail sales were much weaker than expected, while German manufacturing orders unexpectedly fell by 0.6 percent in March -- underlining concerns about slowing economic growth in the region.

A run of poor economic data -- France reported a record trade deficit for March -- has pressured the euro in recent weeks after it hit a record high above $1.60, peeling away perceptions the euro area was insulated from a U.S. downturn.

The dollar gained against major currencies, with the U.S. Dollar Index up 0.81 percent at 73.589.

The euro fell 0.96 percent at $1.5381, and against the yen, the dollar rose 0.52 percent at 105.28.

In the U.S. Treasury market, Hoenig's comments about inflation also cast a shadow.

The benchmark 10-year U.S. Treasury note fell 1/32 to yield 3.93 percent. The 2-year U.S. Treasury note rose /32 to yield 2.40 percent. The 30-year U.S. Treasury bond rose 6/32 to yield 4.66 percent.

Gold fell more than 1 percent as speculators booked profits and turned their attention to other asset classes. However, strong oil prices limited declines, analysts said.

Spot gold prices fell $9.00, or 1.03 percent, to $866.05.

Asian stocks retreated as companies sensitive to high fuel costs, such as airlines, fell.

Japan's Nikkei average closed 0.4 percent higher as the country's financial markets reopened after being closed on Monday and Tuesday for national holidays.

(Editing by Leslie Adler)

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