Libyan turmoil hits stocks as oil surges

2011-02-22 18:12

London - Mounting concerns over Libya’s violent crisis weighed on stocks Tuesday and sent oil prices surging, while the earthquake in the New Zealand city of Christchurch pushed the country’s currency sharply lower.

With deep rifts opening up in Moammar Gadhafi’s regime, air force pilots defecting and a bloody crackdown in the capital of Tripoli, investors are fretting over how the crisis will end and what the impact on the North African country’s oil production will be.

Libya is the world’s 18th largest oil producer, pumping out around 1.8 million barrels a day, or a little under 2% of global daily output. The OPEC country also sits atop the biggest oil reserves in the whole of Africa.

With so much uncertainty surrounding a large chunk of the world’s daily oil production, oil prices surged. Benchmark crude for March delivery was up $6.27 a barrel, or 7.3%, at $92.47 a barrel in electronic trading on the New York Mercantile Exchange.

“The Middle East will remain the market’s focus today with moves in the oil price probably the best single indicator of the market’s assessment of the wider implications of events there,” said Adrian Foster, an analyst at Rabobank International.

With the oil price rising at such a rapid rate, stocks are inevitably under severe pressure.

Rising crude prices are a particular worry for investors as they reinforce fears of inflation and raw materials costs. They also stoke worries of a big drop in global demand levels, as experienced in previous oil price shocks in 1973-4, 1979 and 2008.

“For net oil importers like Japan, the US and some eurozone economies that are suffering from a fiscal contraction, the rise in the oil price will in the first instance act as a tax on consumers, reducing trade surpluses or increasing deficits and threatening an upward creep in headline and possibly core rates of inflation,” said Neil MacKinnon, global macro strategist at VTB Capital.

Those concerns clearly dominated sentiment in stock markets.

In Europe, the FTSE 100 index of leading British shares was down 0.7% at 5 974 while the CAC-40 in France dropped 1% to 4 055. Germany’s DAX bucked the trend, rising by 0.2% to 7 332.

Wall Street was poised for a retreat at the open as traders come back from a three day holiday weekend - Dow futures were down 0.7% at 12 289 while the broader Standard & Poor’s 500 futures fell 1.2% to 1 326.

In the currency markets, the euro was up 0.3% on the day at $1.3686 while the dollar rose 0.1% to 83.11 yen.

An announcement from Moody’s Investor Services that it was putting Japan’s credit rating on watch for a possible downgrade had little market impact as the agency is merely lagging its rival Standard & Poor’s, which earlier this year did actually downgrade its rating on Japan by one notch below Moody’s Aa2 rating.

“The impact of developments in the Africa and Middle East on the yen have far outweighed any impact from Moody’s announcement overnight to place Japan’s credit rating on negative watch,” said Lee Hardman, currency economist at the Bank of Toky0-Mitsubishi UFJ.

Even though Japan has massive public debts, it is widely considered to be one of the safest places for investors to park their cash in troubled times.

A powerful earthquake in the New Zealand city of Christchurch also rattled markets in the region. The quake occurred in the middle of the workday, toppled tall buildings and churches, crushed buses and killed at least 65 people in one of the country’s worst natural disasters.

Following the quake, the New Zealand dollar slid 2% against the dollar while the country’s benchmark stock index fell 0.7% to 3 358.71.

Elsewhere in Asia, the Nikkei 225 stock average shed 1.8% to close at 10 664.70. Hong Kong’s Hang Seng lost 2.1% to 22 990.81 and South Korea’s Kospi dropped 1.8% to 1 969.92.

Mainland China shares saw their biggest loss in over a month - the benchmark Shanghai Composite Index dived 2.6% to 2 855.52 while the Shenzhen Composite Index skidded 2.7% to 1 262.82.

Comments by China’s central bank governor, Zhou Xiaochuan, expressing Beijing’s determination to rein in inflation renewed worries over the likelihood of further moves by the government to cool price increases.