Oil drama weakens shares in Asia and Europe

[January 06, 2015]  By Patrick Graham

LONDON (Reuters) - European stock markets were under pressure for a third day on Tuesday as a fall in oil prices showed no sign of easing off, supporting traditional safe-haven assets such as top-rated government bonds, the Japanese yen and the Swiss franc.

Asian shares had slumped overnight after another day of drama on oil markets that drove U.S. crude to less than $50 a barrel for the first time since the first half of 2009 and handed Wall Street its worst losses in three months.

The resulting bid for safety drove the average of yields on German, U.S. and Japanese 10-year debt to less than 1 percent for the first time.

Some of Europe's major exchanges recovered to trade in positive territory after a rough start, but London's oil- and gas-heavy FTSE  was still down more than half a percent, dragging Europe-wide indices into the red.

U.S. stocks futures, however, pointed to a slightly higher opening on Wall Street.
 

"Global risk sentiment has been hurt by sliding stocks and oil prices. That is leading to a perception that there is a lack of demand - and that has implications for global growth," said Jeremy Stretch, head of currency strategy at CIBC World Markets.

ASIAN SHARES FALL

Japan's Nikkei dropped 3 percent, its largest fall in almost 10 months, while South Korean shares fell 1.7 percent to a one-and-a-half-year low. Even high-flying mainland Chinese shares  pulled back after hitting 5-1/2-year highs earlier in the session. MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.4 percent.

The rout in oil markets has resumed strongly since a Christmas lull, prices plunging by as much as 6 percent on Monday and by another 1.8 percent on Tuesday.

A slew of factors were maintaining the downward pressure on prices, analysts said, pointing to concerns about the Greek economy, high oil output from Russia, Iraq and the United States, and a stronger dollar.

"Falls in oil prices are going beyond many people's expectations. This will put pressure on the earnings of U.S. energy firms," said Hirokazu Kabeya, senior strategist at Daiwa Securities in Tokyo.

Hit by the drop in U.S. 10-year yields and the general concern over global growth that it reflects, the dollar fell by more than half a percent against the yen to as low as 118.65 yen before recovering.

Against a basket of currencies, the U.S. currency continued to gain. The euro fell by a third of a percent to $1.1891, just off Monday's 9-year lows.

"I would be a bit cautious about extrapolating too much so early in the year," said CIBC's Stretch. "This dip in risk appetite is likely to be temporary, and we should see the dollar recover against the yen and expect the euro to head lower."

(Additional reporting by Hideyuki Sano in Tokyo and Anirban Nag in London; Editing by Kevin Liffey)

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