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Record-high oil prices and financial sector weigh on U.S. and European stocks
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NEW YORK: Oil's relentless surge to a fresh high on Friday stoked worries about the economy and put pressure on U.S. and European stock markets, while a $7.8 billion loss at AIG, the world's largest insurer, rekindled fears that the credit crisis was not over.
Oil rose to more than $126 a barrel, extending gains to more than 11 percent since the start of May and fueling fears that the high prices will spark inflation throughout the global economy. Oil set a record high every day this week.
Banking shares led stock markets lower in both the United States and Europe after the insurer American International Group reported its record quarterly loss late on Thursday.
AIG wrote down assets linked to subprime mortgages and said that it would raise $12.5 billion in new capital to strengthen its balance sheet.
News on Friday that Citigroup, the top U.S. bank, planned to shed $400 billion in assets also put pressure on the financial sector.
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"Over the past weeks, investors got the feeling that the credit crisis was easing, but a piece of news like that is sort of a wake-up call that reminds us that the storm is far from over," said Marie-Pierre Peillon, head of equity and credit research at Groupama Asset Management in Paris.
"This Citigroup move might just be the beginning."
Paul Nolte, director of investments at Hinsdale Associates in Hinsdale, Illinois, voiced a similar sentiment: "Many more financial institutions will be needing to raise capital to shore up balance sheets."
The Dow Jones industrial average fell 120.90 points to close at 12,745.88. The Standard & Poor's 500 index declined 9.40 points to 1,388.28. The Nasdaq composite index fell 5.72 points to 2,445.52.
For the week, the Dow fell 2.4 percent, the S&P 500 dropped 1.8 percent and the Nasdaq fell 1.3 percent.
Shares of AIG fell 8.8 percent to $40.28 on Friday, while Citigroup lost 2.8 percent to $23.63.
Despite the higher crude oil prices, Exxon Mobil was among the top drags on the S&P 500 and Dow, with its shares down 0.8 percent at $88.82. Analysts said investors may be locking in profits after strong gains in recent weeks. In addition, others said that when energy prices reach a certain level it becomes more difficult for energy companies to pass on their higher costs to consumers.
In Europe, shares fell and capped their first weekly loss in a month on renewed concern over the outlook for the financial sector and the drag from the record high oil price.
The FTSE Eurofirst 300 index of top European shares fell 1.3 percent to close at 1,342.68 points. Declining shares outnumbered advancers by about five to one.
The DJ Stoxx index of European banks fell 1.7 percent, bringing this week's decline to 3.7 percent.
Société Générale, BNP Paribas and Barclays each lost between 2 percent and 2.5 percent.
The French drugmaker Sanofi-Aventis was the biggest individual negative weight after the threat of generic competition for its blockbuster blood-thinner Plavix surfaced in Europe. Sanofi shares fell nearly 6 percent.
The renewed credit worries, prompted by the loss at AIG, bolstered the appeal of government debt on both sides of the Atlantic.
Benchmark 10-year U.S. Treasury notes posted their best week in nearly two months, while the yield on 10-year Bunds fell to their lowest in three weeks to below the key psychological 4 percent level.
"The rise in risk aversion is mostly AIG," said Ron Simpson, director of FX research at Action Economics in Tampa, Florida. "It's brought credit market nervousness back."
French industrial production fell 0.8 percent in March from the previous month, a sharper drop than expected, according to data that highlighted slowing growth in the euro zone.
"You get the feeling from the corporate sector that the international credit crisis is taking its toll and this will change the entire landscape of earnings forecasts, which for the time being are still quite upbeat," said Heino Ruland, a strategist for FrankfurtFinanz.
In commodities markets, U.S. crude settled up $2.27 at $125.96 a barrel before rising to a record $126.25 in late post-settlement trade. London Brent crude gained $2.56 to settle at $124.40 a barrel, off the earlier high of $125.90.
"Lingering geopolitical fears and high heating oil prices are helping the market, but the speed of the rise is too fast," said Tatsuo Kageyama, an analyst at Kanetsu Asset Management in Tokyo.
In currency trading, the euro rose to $1.5465 from $1.5403 late Thursday. The pound fell to $1.9501 from $1.9547. The dollar fell to ¥102.975 from ¥104.00, and to 1.0421 Swiss francs from 1.0520.
U.S. Treasury debt prices rose.
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