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Risk shunned as oil extends drop

Apr 12 2011 10:26 Reuters

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Singapore - A decline in crude oil prices on Tuesday from a 32-month high that could extend in the near term triggered a bout of profit-taking in risky assets, causing investors to sell equities and slash their bets against the yen and US dollar.

The global rout in commodity prices also hurt demand for the Australian dollar, which dropped 2% against the yen, and weighed on US stock futures.

The drop in crude was triggered in part by a Goldman Sachs report, which advised investors to lock-in trading profits before oil and other commodity markets reverse.

"Open interest has been building up since the start of the new quarter in April, reflecting fresh inflows of speculative money into the oil market," said an energy analyst at a leading Japanese trading house who declined to be named.

"The Goldman report put a damper on this flow, at least for now, given that there was a sense of an overshoot in the market," he said.

Brent crude for May fell to a low of $121.97 a barrel, easing from Monday's 32-month peak of $127.02. US crude fell to as low as $107.87.

Developments in Libya, where a peace bid collapsed on Monday, may also provide cues.

Brent may fall to as low as $118.67, while US crude may find support at $106.81, charts indicated.

Commodity shares from Australia to Japan led a broad decline in Asian equities, after energy and metals prices slid overnight, while gold and silver, traditionally safe-haven investments, also gave up gains.

Tokyo's Nikkei share average ended the day down 1.6%, as blue-chip stocks declined on increasing uncertainties about the earnings outlook after the March 11 earthquake.

"Many people worry that more and more large-cap companies including big automakers may cut their earnings estimates for the business year," said Hideo Arimura, senior fund manager at Mizuho Asset Management.

The MSCI index of Asia Pacific shares outside Japan was down 1.8% and on course for the biggest daily decline since the quake in Japan triggered panic selling in the region on March 15.

Days after that though foreign investors had been key buyers of Asian shares, pushing the benchmark indexes of major markets up between 7% and 13% over the past three weeks.

Yen recovers sharply

The yen gained about 1% against the dollar, about 1.3% against the euro and more than 1.7% against the Australian dollar .

A series of aftershocks haunted Japan, which raised the severity of its nuclear crisis to the highest level, putting it on par with Chernobyl.

Some traders said that the market was by now getting numb to the quakes.

The US dollar fell to ¥83.80 per dollar , off a seven-month low of ¥85.54 set on Thursday. The euro slipped to ¥120.58, down from Monday's peak of ¥123.33.

Spot gold slipped to hit a low of $1 453.31 an ounce on Tuesday, retreating from a record $1 476.21 an ounce on Monday, while spot silver traded at $40.12 an ounce, below a 31-year high at $41.93 struck on Monday.

US 10-year Treasury notes edged higher in Asia on Tuesday, helped by a pull-back in oil prices and US equity futures, but near-term gains may be limited if an uptrend in commodities resumes.

Ten-year US Treasuries yielded 3.558%, down 4 basis points from late US trade on Monday , pulling away from a seven-week high of 3.62% hit last Friday. Ten-year note futures rose 4/32 to 118-18.5/32.

commodities  |  markets  |  oil
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