January 21, 2007 / 12:26 PM / 13 years ago

Oil fall dents stocks, emerging mkts, dlr strong

LONDON (Reuters) - Stocks and emerging markets fell on Wednesday as moves by Venezuela to nationalise key industries and a sharp dive in crude oil prices in recent sessions encouraged investors to move out of riskier assets.

An employee looks down at Hungarian oil and gas group MOL's main Duna (Danube) refinery in Szazhalombatta January 9, 2007. REUTERS/Laszlo Balogh

Wall Street was set for a softer start as concerns about the path of global interest rates also troubled equity and emerging market investors.

The dollar rose to a six-week high against the euro, buoyed by fading expectations of U.S. interest rate cuts, better-than-expected trade data and an outflow of funds from emerging markets.

“People are getting squeezed out of short dollar/long emerging market positions. The fact that commodity prices have fallen is softening equity prices and raising the spectre of global growth concerns,” said Koon Chow, emerging markets strategist at Barclays Capital in London.

U.S. light crude oil extended losses, falling 1 percent to about $55 a barrel, having hit an 18-month low and driven the Reuters/Jefferies CRB Index to its lowest in nearly two years on Tuesday.

Warm weather in the U.S. northeast has dented demand for heating oil and traders are awaiting weekly oil inventories data due at 1530 GMT, which is expected to show falling crude stocks but a build in other products.

RISK APPETITE RATTLED

Analysts said the 9 percent fall in crude prices since the start of the year had forced some investors betting on higher oil prices to cut their losses and sell assets across markets.

Along with weaker commodity prices, a host of geopolitical developments have reminded investors of the need for a premium from emerging assets.

Venezuela’s decision to nationalise some major oil projects and other industries, measures by Thailand to tighten rules on majority-owned foreign companies, a gas dipute between Russia and Belarus, delays to Turkish privatisations and concerns about the appointment of a new Polish central banker have also weighed on sentiment.

“At the edges there is a fraying in the risk appetite trade,” said Peter Lucas, global investment strategist at fund manager Ashburton.

“I see the biggest risk as a general unravelling of risk appetite, a gradual loss of confidence in the bond market, ultimately culminating with another top in equities.”

However, the global economy was looking relatively robust and oil and commodity prices could easily rebound, he added.

Global equities struggled, with Europe’s FTSEurofirst 300 down 0.7 percent and touching a two-week around 1,472 points and Japan’s Nikkei falling 1.7 percent, clocking up its biggest one day percentage decline since November 20.

The lower oil price weighed on energy majors like BP, while moves by Apple Computers to introduce its new iPhone dented rival phone suppliers such as Nokia.

Mobile network firm Vodafone also fell after confirming plans to submit a formal bid to buy India’s Hutchison Essar.

DOLLAR GAINS

The dollar benefited from the switch out of more peripheral and commodity-based economies, as well as fading expectations that the Federal Reserve will cut interest rates in the coming months.

The dollar hit 1-1/2 month highs against both the euro and a basket of currencies as stronger-than-expected U.S. jobs data last week showed the world’s largest economy remained in relatively good health.

“The payrolls data has led to rate expectations being factored out, it’s a corrective phase after the dollar was being oversold,” said Peter Fontaine, currency strategist at KBC in Brussels.

“Investors are turning to the U.S. dollar as Venezuela is undermining emerging market sentiment.”

Data showing the U.S. November trade deficit narrowed to its lowest since July 2005 at $58.23 billion from $58.8 billion in October also supported the dollar.

The euro fell to a 1-1/2 month low close to $1.2950 and was trading at $1.2970 at 1335 GMT, down 0.2 percent on the day.

The dollar was steady versus the yen at 119.40.

Government bonds were mixed, with Treasuries dipping on a jump in U.S. mortgage applications, while euro zone bonds were slightly firmer.

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