Oil prices sink further and give boost to European shares

[January 12, 2015] By Marius Zaharia

LONDON (Reuters) - Oil prices showed no sign of escaping their downward spiral on Monday and signs emerged that cheap crude may have a positive impact on the European economy, with airlines and the auto industry leading the region's shares higher.

The U.S. dollar edged higher as the majority of investors who expect a stronger greenback were given a chance to reload after a weakening in the aftermath of a surprise fall in U.S. wages on Friday.

German airline Lufthansa rose 2.5 percent after saying it expects the lower price of oil to cut its fuel bill for 2015 by 13 percent after the cost of hedging, setting it on course for a rise in profit this year.

Automotive supplier Continental rose 2.3 percent after saying it expects sales growth to quicken to around 5 percent this year as global passenger car production rises moderately.

"Historically, oil price collapses coincided with a weakening economy. This time it's different and the market has to learn that," said Jochen Rothenbacher, research and sales director at Equinet Bank in Frankfurt.

The pan-European FTSEurofirst 300 index rose 1 percent to 1,361.64 points, while the euro zone's blue-chip Euro STOXX 50 index advanced 1.5 percent. Wall Street was also expected to open higher.

In contrast, the cheap oil and stronger dollar added to pressure on emerging markets, with Russia once again suffering most of the pain. Moscow was downgraded to BBB- by Fitch late on Friday.

"The more oil falls the more the numbers don't add up for Russia," said Manik Narain, strategist at UBS.

U.S. crude for February was down $1.13 at $47.23 per barrel and the February Brent contract was down $1.31 at $48.80 a barrel. Both hit their lowest since April 2009.

Analysts at Goldman Sachs lowered their three-month price forecast for Brent to $42 a barrel from $80 and cut U.S. crude to $41 from $70, adding it would stay near $40 for most of the first half of 2015. [O/R]

Fires over the weekend at refineries in Ohio and Pennsylvania also hurt demand for crude in the United States.

DOLLAR STILL STRONG

The dollar rose 0.3 percent against a basket of currencies after falling on Friday when investors shrugged off a strong increase in U.S. payrolls, focusing on a five-cent decline in hourly wages, the biggest in at least eight years.

Friday's reaction came as markets pushed out the likelihood of a Federal Reserve interest rate hike, but the stark contrast between monetary policy in the United States and that of other big economies such as the euro zone and Japan kept the greenback in demand.

"The earnings figures may be an aberration as they don't correlate with everything else that is going on in the labor market," said Marshall Gittler, head of global FX strategy at IronFX.

In bond markets, Spanish and Italian 10-year yields slipped after Italy's central bank chief said on Sunday the risk of deflation in the euro zone should not be underestimated. He said the best way to tackle the problem was to buy government bonds.

The drop in the dollar helped gold nudge up to its highest in a month around $1,231 an ounce.

(Additional reporting by Francesco Canepa; Editing by Peter Graff)

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