(Recasts with U.S. markets, changes byline; dateline previous
LONDON)
* Bank shares take another beating as global stocks tumble
* Oil shy of new record as Mideast, supply concerns weigh
* Dollar rebounds vs euro on strong ISM manufacturing data
* U.S., euro government debt pare gains on strong ISM data
By Herbert Lash
NEW YORK, July 1 (Reuters) - Tumbling European and U.S.
banking shares soured equity markets on Tuesday as the second
half of 2008 started with a heavy aversion to risk spurred by
surging oil and inflation fears.
Heightened fears of further losses in stocks, especially
the battered banking sector, prompted investors to sell dollars
and buy the yen, which tends to garner support in times of
mounting risk aversion.
U.S. and euro zone government debt prices rose as traders
favored bonds over stocks. Investors were drawn to the safe
bets amid lingering woes in the banking sector and worries
about corporate profits.
A report that showed U.S. factory activity expanded in June
for the first time in five months initially offset worries
about rising energy prices and even helped some U.S. financial
stocks to rise as investors scoured for bargains.
The unexpected rise to 50.2 in June from 49.6 in May in the
Institute for Supply Management's manufacturing index helped to
temper oil's gain. A reading above 50 signifies expansion.
"The simple headline that it was above 50 was enough to
spur a little bit of buying in the (stock) market," said
Richard Sparks, senior equities analyst at Schaeffer's
Investment Research in Cincinnati.
However, "the overriding concern on oil prices and the
tensions in the Middle East are going to be bigger worries. I
don't think these numbers will be enough to overcome that."
Citigroup <C.N>, which last week hit a 10-year low, jumped
2.3 percent and Merrill Lynch & Co Inc <MER.N>, the world's
largest brokerage, rose 0.7 percent before both later succumbed
as U.S. stock markets slumped further.
A sharp drop in June automotive sales also pressured
stocks. Ford Motor Co <F.N>, for example, said U.S. sales fell
28 percent in the month. Its stock fell 6.5 percent.
European stocks fell sharply, ending at their lowest close
since October 2005, as jitters about further asset write-down
came back to haunt the banking sector and rising oil prices
continued to exacerbate inflation fears.
Banks took yet another beating. Among the largest banks,
UBS <UBSN.VX> hit 10-year lows, down 5.3 percent, while
Deutsche Bank <DBKGn.DE> lost 4.2 percent.
Italy's Banca Popolare di Milano <PMII.MI> was the only
component of a 62-stock Dow Jones European banking index
<.SX7R> to close higher, up 0.7 percent. The index fell almost
3 percent, and is down 46 percent since peaking in June 2007.
The FTSEurofirst 300 <> index of top European shares
closed 2.2 percent lower at 1,175.55 points. The index, down
seven of the last 10 sessions, has tumbled 22 percent in 2008.
"The impact from the U.S. subprime market debacle is far
from over, especially for retail banks and insurers, while
investment banks have already unveiled big write-downs," said
Romain Boscher, head of equity management at Groupama Asset
Management, in Paris.
Investors' appetite for bonds eased in reaction to the
unexpectedly strong growth component in the U.S. manufacturing
report, which showed its prices paid index rose to its highest
in almost three decades and fanned fears of inflation eroding
bond values.
"It's negative for bonds and pro stocks. It paints a slow
growth scenario with rising inflation. That's a tough path for
the Fed to traverse," said George Adell, fixed income
strategist at Commerce Capital Markets in Jupiter, Florida.
The benchmark 10-year U.S. Treasury note <US10YT=RR> rose
9/32 to yield 3.94 percent. The 30-year U.S. Treasury bond
<US30YT=RR> added 6/32 to yield 4.51 percent.
Yen gains versus the dollar were limited as demand for the
greenback rose after the relatively strong manufacturing
report.
The dollar fell against major currencies, with the U.S.
Dollar Index <.DXY> down 0.28 percent at 72.27. Against the
yen, the dollar <JPY=> fell 0.44 percent at 105.62.
The euro <EUR=> rose 0.33 percent at $1.5807.
"In times of uncertainty and when stocks across the globe
are tanking, investors buy yen -- It's that simple," said
Andrew Busch, a global foreign exchange strategist at Bank of
Montreal in Chicago.
Oil rose on forecasts global supplies will struggle to keep
pace with demand and rising tensions between Israel and OPEC
producer Iran.
The International Energy Agency forecast global oil supply
capacity will reach 95.33 million barrels per day by 2012, some
2.7 million barrels less than a year ago forecast.
U.S. light sweet crude oil <CLc1> rose $2.11 to $142.11 per
barrel.
Gold spiked more than 2 percent to a 10-week high as rising
oil prices fueled buying as an inflation hedge.
Spot gold prices <XAU=> rose $19.00 to $943.10.
Most Asian stock markets fell. Asia-Pacific shares traded
outside of Japan <.MSCIAPJ> dipped 0.8 percent to a three-month
low, according to an MSCI index.
Japan's Nikkei <> share average finished 0.1 percent
lower for its ninth straight loss, shedding nearly 7 percent
during its longest losing streak since September 2004.
(Reporting by Walker Simon, Richard Leong, Chris Reese,
Vivianne Rodrigues in New York; Ikuko Kao and Jan Harvey in
London and Blaise Robinson in Paris)
(Reporting by Herbert Lash. Editing by Richard Satran)
