(Adds close of U.S. markets)
By Herbert Lash
NEW YORK, May 7 (Reuters) - Oil prices shot further into
record territory on Wednesday, topping $123 a barrel, stoking
inflation fears and sending U.S. stock markets spiraling lower,
with the Dow industrials slumping more than 200 points.
Remarks from a Federal Reserve official warning that the
central bank must be ready to raise interest rates to curb
inflation also pressured stocks, led by declines in financial
shares.
The president of the Kansas City Fed, Thomas Hoenig, in a
speech late on Tuesday called the inflation outlook
"troublesome," and his remarks increased expectations that the
U.S. central bank's cycle of aggressive interest rate cuts may
be nearing an end.
The dollar gained after Hoenig's remarks.
U.S. Treasury debt prices hit session highs as stocks
extended losses on resurgent oil prices, which fueled worries
that soaring energy costs will crimp the consumer and hobble
the overall economy, increasing the safe-haven appeal of
government bonds.
"Inflation is definitely a worry because the Fed doesn't
have that much to fight inflation except by raising interest
rates," said Alan Lancz, president of investment adviser Alan
B. Lancz & Associates Inc in Toledo, Ohio.
"If the economy is not growing the way they want, raising
interest rates all adds up to a difficult environment," he
said.
The Dow Jones industrial average <> fell 206.48 points,
or 1.59 percent, at 12,814.35. The Standard & Poor's 500 Index
<.SPX> fell 25.69 points, or 1.81 percent, at 1,392.57. The
Nasdaq Composite Index <> fell 44.82 points, or 1.80
percent, at 2,438.49.
The S&P Financial index shed 3.66 percent, with shares of
top U.S. bank Citigroup plunging 5.4 percent, Countrywide
Financial Corp <CFC.N> falling 7.5 percent, and Bank of America
<BAC.N> down 3.2 percent.
Earlier in Europe, shares notched their highest close since
mid-January, helped by a weaker euro and results at
construction and technology groups that beat expectations.
U.S. and European equity markets got an initial lift from
U.S. government data that showed higher-than-expected worker
productivity gains and a lower-th`n-expected rise in unit labor
costs, which soothed some inflation fears.
But pending U.S. home sales fell in March, as expected, and
provided little upside for investors.
In Europe, the pan-European FTSEurofirst 300 index <>
rose 0.8 percent at 1,362.11 points, its highest point since
mid-January.
The technology sector <.SX8P> was the best performer in
Europe after Cisco Systems <CSCO.O>, the largest U.S. maker of
routers and switches that direct Internet traffic, reported
better-than-expected quarterly results late on Tuesday.
Nokia <NOK1V.HE>, Ericsson <ERICb.ST> and ASML <SML.AS>
gained about 4 percent.
Strong profits at French cement maker Lafarge <LAFP.PA>
lifted constructions stocks.
In the commodities market, oil at first eased after figures
from the U.S. Energy Information Administration showed crude
oil inventories rose 5.7 million barrels last week, more than
analysts' consensus estimates of 1.6 million barrel increase.
But distillate inventories, including heating fuel and
diesel, dropped by 100,000 barrels to 105.7 million barrels,
against analysts' expectation of an 800,000 barrel increase.
"Traders were trying to comb the EIA data for any bullish
feature and they found it in distillates," Jim Ritterbusch,
president of Ritterbusch & Associates, said.
Traders also remained concerned about supply disruptions in
Nigeria. Also, concerns surfaced over supplies from Iran, the
world's No. 4 oil producer, when Tehran earlier this week said
it would refuse nuclear inspections.
IN addition, the head of the state-run company of OPEC
member Libya said oil prices would rise further.
U.S. crude <CLc1> leapt $1.69 to settle at $123.53 a barrel
after hitting an all-time peak of $123.80, the third record
this week. London Brent <LCOc1> rose $2.01 to $122.32.
Crude prices have doubled in the past year, weighing on
economies already hard hit by a housing slump and a credit
crisis that weakened U.S. growth and is spreading to Europe.
The dollar gained, bolstered by comments by the Fed's
Hoenig late on Tuesday that rates will need to be raised in a
timely way as the central bank grapples with a serious threat
of inflation.
The euro fell on reports showing euro zone retail sales
were much weaker than expected, while German manufacturing
orders unexpectedly fell by 0.6 percent in March -- underlining
concerns about slowing economic growth in the region.
A run of poor economic data -- France reported a record
trade deficit for March -- has pressured the euro in recent
weeks after it hit a record high above $1.60, peeling away
perceptions the euro area was insulated from a U.S. downturn.
The dollar rose against major currencies, with the U.S.
Dollar Index <.DXY> up 0.66 percent at 73.477.
The euro <EUR=> fell 0.80 percent at $1.5406 and against
the yen, the dollar <JPY=> rose 0.02 percent.
In the U.S. Treasury market, Hoenig's comments about
inflation also cast a shadow.
The benchmark 10-year U.S. Treasury note <US10YT=RR> rose
16/32 to yield 3.86 percent. The 2-year U.S. Treasury note
<US2YT=RR> gained 5/32 to yield 2.32 percent. The 30-year U.S.
Treasury bond <US30YT=RR> rose 32/32 to yield 4.61 percent.
U.S. gold futures closed down but off session lows as a
late surge in crude prices to record highs helped offset a
firmer dollar.
The June contract <GCM8> for gold in New York settled down
$6.50 at $871.20 an ounce.
Asian stocks retreated as companies sensitive to high fuel
costs, such as airlines, fell.
Japan's Nikkei average <> closed 0.4 percent higher as
the country's financial markets reopened after being closed on
Monday and Tuesday for national holidays.
(Editing by Leslie Adler)
