Oil, commodities slip on outlook

By Herbert Lash

NEW YORK (Reuters) - Widespread doubts about the strength of the world's economic recovery hit crude oil and commodity prices on Monday, helping the yen to gain broadly and the U.S. dollar to edge up as investors shunned risk.

Global equity markets fell, pulled lower by energy and raw materials-linked stocks, but the Dow and broad S&P 500 index rose in a late-day rally as investors snapped up defensive stocks amid continued concern over the economic outlook.

The trigger for the sell-off in commodity prices was the weaker-than-expected U.S. unemployment data released last Thursday before a U.S. holiday on Friday. The Reuters-Jefferies CRB index .CRB, a global commodities benchmark, fell 2.3 percent.

Crude oil settled 4 percent lower, at $64.05 a barrel, on the New York Mercantile Exchange as doubts over a potential rebound spurred investor risk aversion. Earlier, crude prices fell to a five-week low of $63.40.

When risk aversion rises, investors cut holdings of stocks and higher-yielding currencies and often buy back yen and the U.S. dollars that were used to finance the trades.

"Belief was building that we would see a straight-line recovery but a lot of that optimism is coming out of the market in a big way today," said Mark Frey, head trader at Custom House, a currency services firm in Victoria, British Columbia.

"So it's a classic risk-aversion move, with global equities coming off and commodities down, causing commodity currencies to take it on the chin while boosting the dollar and yen."

U.S. gold futures fell towards $920 an ounce as tumbling crude oil prices reinforced the view that inflation was nowhere imminent, lessening bullion's appeal as a store of value.

August gold futures settled down $6.70 to $924.30 an ounce in New York.

U.S. stocks initially followed the rest of the world lower as weakness in last week's June employment report still cast a pall over Wall Street, said Robert Auer, senior portfolio manager of SBAuer Funds in Indianapolis.

"The market is now wanting to see what the earnings season has in store," Auer said. "And it's not just what the numbers are. It's going to be what the companies say that's going to be more important."

The Dow Jones industrial average .DJI closed up 44.13 points, or 0.53 percent, at 8,324.87 and the Standard & Poor's 500 Index .SPX rose 2.30 points, or 0.26 percent, at 898.72.

But the Nasdaq Composite Index .IXIC fell 9.12 points, or 0.51 percent, at 1,787.40.

While data released early Monday by the U.S. Institute for Supply Management showed the service sector contracted in June at a slower pace than expected, last week's much worse-than-expected U.S. jobs report coloured market sentiment.

Shares of aluminium producer Alcoa Inc AA.N slid 6.1 percent, making it the top drag on the Dow. Alcoa kicks off the second-quarter earnings season on Wednesday.