By Veronica Brown
LONDON, May 23 (Reuters) - The near-certainty of oil seeking
fresh record highs kept the spectre of inflation at the
forefront of investors' minds on Friday, with shares pressured
and U.S. Treasuries taking stock after a battering this week.
Crude was hunting higher ground, up $1.08 on the day at
131.90 per barrel <CLc1>, having consolidated from the previous
day's run to a record $135.09.
With worries on supply showing no sign of abating and oil
bulls tantalised by the prospect of prices hitting $150 and even
$200, markets are bracing for the possibility of dramatic second
round inflation effects.
"There's a short-term wave of high inflation but the
question is does it get embedded into something darker and
deeper?" said Justin Urquhart Stewart, investment director at
Seven Investment Management.
European stock markets slipped, weighed down by losses in
commodity stocks. The pan-European FTSEurofirst 300 index of
leading shares was down 0.6 percent at 1336.70 <>.
Growing expectations that the U.S. Federal Reserve may be
forced into raising interest rates to combat rising price
pressures, after slashing by 325 basis points since September,
battered U.S. Treasuries this week.
U.S. benchmark 10-year note yields <US10YT=RR> stood at 3.90
percent, having hit 3.96 on Thursday and a five-month high last
week at 3.986 percent.
Thursday's pummelling of U.S. Treasuries helped propel
benchmark 10-year Japanese government bond yields <JP10YTN=JBTC>
to their highest since August 2007.
Market players are looking to see if the 10-year yield
finally pushes above 4 percent, which could lead to further
selling.
"An increase in risk-seeking coupled with rising inflation
and inflation expectations represents a perfect storm for
nominal bonds, whether or not they have the stamp of the US
Treasury," State Street Global Markets said in a note to
clients.
"They are one asset you definitely don't want to hold in
such an environment."
WARY DOLLAR STEADIES
Inflationary fears have haunted the dollar, which took a hit
on Thursday as crude vaulted $135, as investors focus major U.S.
consumption of energy and potential second-round effects of
sky-high oil on its flailing economy.
The U.S. currency had recovered some poise on Friday, but
currency watchers were on alert for further rises in oil and
data on the problematic U.S. housing sector.
"The focus will be on crude if home sales data comes in weak
as expected," said Tomoko Fujii, Bank of America's head of
economics and strategy for Japan.
"Crude oil rises will continue to hurt the dollar as they
boost U.S. import costs while it helps the euro by making the
ECB more vigilant on inflation."
The euro traded at $1.5715 <EUR=>, barely changed and
hovering near a one-month high of $1.5814 touched on Thursday.
Little impact was seen from a flash reading of the RBS/NTC's
euro zone services PMI, which came in at 50.6 in May, sliding
from 52.0 in April and lower than expectations for a 51.7
reading [].
German figures fell to 53.7 in May from 54.9 last month,
while manufacturing held roughly steady [].
(Additional reporting by Sitaraman Shankar in London; editing
by David Christian-Edwards)
