Stocks nosedive on rate worries, oil below $70

LONDON - Global share markets nose-dived on Thursday amid fears that expected interest rate rises in Europe later in the day and in the United States later this month will hurt economic growth and corporate profits.

By (Reuters)

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Published: Thu 8 Jun 2006, 5:50 PM

Last updated: Sat 4 Apr 2015, 3:23 PM

Prices for gold, copper and oil also fell as investors rushed for the exits on trades that delivered sharp gains in the first five months of the year.

Crude prices extended declines to a two-week low below $70 a barrel after Iraq’s prime minister announced that the Al Qaeda leader in Iraq, Abu Musab Al Zarqawi, had been killed by security forces.

Europe’s FTSEurofirst 300 tumbled 2.4 percent to 1,258 points in morning trade, its lowest since December last year, and Japan’s Nikkei average racked up its biggest one-day loss in a year, closing down 3.1 percent at 14,633 points.

Mark Tinker, head of strategy at stock broker Execution, said traders who had taken speculative positions in the past two weeks, based mostly around the dollar falling, were cutting their losses.

“This is capitulation by short-term traders, as opposed to the sell-off in May, which was profit-taking by long-term investors,” Tinker said. “People are just throwing in the towel on some of these markets.”

Traders were also wary that the European Central Bank might decide on a “macho” 50 basis point rise in interest rates, Tinker said. Its decision is due at 1145 GMT.

The ECB is expected to deliver a quarter-point rate rise to 2.75 percent, coupled with tough talk on inflation to warn that further hikes remain in store, but talk of a 50 basis point hike has surfaced after strong euro zone data in recent days.

Before then, the Bank of England appears almost certain to leave interest rates on hold for a 10th straight month when it announces its decision at 1100 GMT.

US rates to rise

Fresh comments from a Federal Reserve official overnight cemented expectations that US interest rates will rise again later this month.

Atlanta Fed President Jack Guynn said the central bank would not let its guard down when it comes to containing price pressures, echoing Fed Chairman Ben Bernanke’s remarks earlier in the week that vigilance was needed to keep inflation under control.

Guynn’s comments helped boost the dollar to a one-month high against the yen, which still has interest rates near zero.

The dollar was up 0.5 percent at 144 yen and was trading at $1.2755 per euro, its strongest in more than a week.

“The dollar is supported on US rate hike hopes,” said Hideaki Inoue, forex manager at Mitsubishi UFJ Trust and Banking in Tokyo. “But with a June hike now nearly priced in, some people doubt if the dollar can rise further.”

Metals, oil slide

The strength in the dollar and the sell-off in commodity markets pummelled gold, sending prices down $10 to around $620 an ounce. Copper prices also fell more than 3 percent.

US light crude was down almost $1 a barrel at $69.86 after Iraqi Prime Minister Nuri Al Maliki announced that a joint US and Iraqi military raid had killed Zarqawi, blamed by the United States for the beheading of foreign captives and suicide bombings which have killed hundreds.

Oil exports from Iraq zare still short of pre-war levels due to frequent sabotage and deteriorating security that has prevented significant investment.

While metal and energy markets have come off sharply since mid-May, gold is still up nearly 20 percent in 2006, oil is up 16 percent and copper 71 percent.

Euro zone government bonds benefited from their safe-haven status as commodity and stock markets tumbled, with the death of Zarqawi not seen as necessarily reducing political risk.

“This is still an equities-related gain by Bunds, but boosted by safe haven flows after (US General George) Casey said that Zarqawi’s group still poses a threat,” said a trader in London. “In fact, you could see an increase in retributive attacks in Iraq now.”

The yield on 10-year euro zone government bonds fell to 3.952 percent while the June Bund future was up 32 ticks at 116.09.

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