GLOBAL MARKETS-Higher oil prices hit shares, ECB money eyed

Mon Feb 27, 2012 8:36am EST

* European shares down 0.8 pct on oil price worries

* Oil eases off 10-month highs

* Euro hovers below 10-week highs

By Richard Hubbard

LONDON, Feb 27 (Reuters) - European shares and other risk assets like the euro and precious metals fell on Monday while the U.S. dollar gained as investors worried that higher oil prices could flatten the fragile global economic recovery.

But the European Central Bank's planned mid-week injection of cheap three-year loans into the region's banking system, expected to total around half a trillion euros ($675 billion), is keeping the losses in check.

The euro was down 0.4 percent at $1.3400, not far from a 2-1/2 month high of $1.3486 set on Friday, with gains seen possible before the ECB's second longer term refinancing operation (LTRO) on Wednesday - despite the unease about the global risks posed by oil costs and the relentless euro crisis.

In line with the widespread weakness, U.S. stock index futures pointed to a lower open for equities on Wall Street on Monday.

"At least for now a large ECB LTRO could be positive for the euro as the market will focus on the positives and it will increase risk appetite," Richard Falkenhall, currency strategist at SEB in Stockholm said.

But some market players say the impact of the ECB's operation may already be largely reflected in the prices of assets like European sovereign bonds and even the euro itself.

"It's all pretty well priced in and pretty well expected. We're looking for just under 500 billion euros and about 300 billion euros of net new liquidity," said Kevin Lecocq, chief investment officer, Private Wealth Management, at Deutsche Bank.

"Wednesday won't be big," Lecocq forecast.

A weekend meeting of 20 finance ministers from the world's major economies, which failed to reach an agreement on making more funds available to Europe to fight its debt crisis, was largely ignored with concern focussed instead on whether the German parliament will endorse the Greek bailout on Monday.

The vote is expected to be tight but lawmakers will almost certainly support the package.

RECOVERY RISK

With the global economy generally struggling, higher oil costs are seen as the biggest risk to the global rally in equities and commodities that has been driven by a renewed round of policy easing by the world's major central banks since the ECB's first massive injections of loans last December.

March Brent crude futures were down about $1.37 to $124.10 a barrel but still up 16 percent for the year after a 13 percent gain in 2011. U.S. crude slipped $1.53 to a low of $108.24.

Oil has been rising this year due to supply concerns related to worsening tensions over Iran's disputed nuclear programme. It may have begun to pare some of those gains after Saudi Arabia increased exports sharply in the past week, and because the Obama administration is looking to see what circumstances could warrant a tap of U.S. strategic oil reserves.

The U.S. dollar hit a 9-month high above 81.60 yen, a gain of about 7 pct so far in February, as higher oil prices joined a list of factors weakening the yen, including Japan's 2011 trade deficit, its first since 1980, Bank of Japan monetary easing and the threat of intervention.

In European equity markets the oil price gains hit the outlook for the automobile sector sending the FTSEurofirst 300 index of top European shares down 0.8 percent to 1,068.48 points, below a seven-month high last week.

Global equities suffered from a weaker session in Asia and the European falls, with the MSCI world equity index down 0.5 percent at 3,300.18 but still up over 10 percent for the year to date.

Gold, which is up over 13 percent this year, fell nearly 1 percent to $1,764.80 an ounce, platinum was down 0.9 percent at $1,692.99 an ounce and silver was down 0.7 percent at $35.12 an ounce.

Precious metals are generally a safe haven from risk and have gained from fears that the hopes of resolution Europe's debt crisis are overdone. But they have also tracked the euro higher as some investors move away from ultra-safe assets like low-yielding U.S. Treasuries.

In the debt markets the approaching ECB loan operation has supported riskier assets and short-dated Italian and Spanish bonds actually rallied on Monday as investors positioned for the fresh boost expected from the ECB's money injection.

The yield on Italy's two-year bonds dropped by 19 basis points to an 11-month low of 2.75 percent, with a strong auction of Italian treasury bills adding momentum.

"I suspect this is market positioning in anticipation of a relatively significant LTRO (long-term refinancing operation)take up," said Rabobank strategist Richard McGuire.

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