(Updates prices, adds U.S. outlook)
By Ian Chua
LONDON, May 23 (Reuters) - A rebound in oil prices kept
inflation fears at the forefront of investors' minds on Friday,
weighing on Asian and European stocks and setting the scene for
a poor start on Wall Street.
European and U.S. bond yields, however, eased slightly after
rising sharply this week as investors squared books ahead of
holidays in the U.S. and UK on Monday.
Crude oil was hunting higher ground, up $1.58 on the day at
$132.41 per barrel <CLc1>, staging a recovery from a strong bout
of profit-taking in the previous session that knocked prices
more than 3 percent off a record high of $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.
"All the talk is about oil and obviously that has got major
implications for inflation. The oil price seemed to have
accelerated if anything, rather than showing signs of topping
out," said Jason Simpson, a bond strategist at ABN AMRO in
London.
European stock markets slipped as commodity stocks took a
breather from their recent run up. Germany's DAX <> and
Britain's FTSE <> both shed about 0.5 percent, while the
FTSEurofirst 300 index of leading European shares <> fell
0.7 percent.
Earlier, Japan's Nikkei <> managed to eke out a 0.2
percent gain as a softer yen helped boost exporters, but MSCI's
index of other Asian stock markets <.MIAPJ0000PUS> slid 1.2
percent.
U.S. stock futures <DJc1><SPc1><NDc1> were all down about
0.4 percent, pointing to a weaker start for U.S. markets.
Growing expectations that major central banks may be forced
into raising interest rates to combat rising price pressures
have helped driven government bond yields higher this week.
In Europe, the 10-year Bund yields <EU10YT=RR> hit a 4-1/2
month high of 4.322 percent earlier in the session, before
recoiling to 4.260 percent.
Ten-year Japanese government bond yields <JP10YTN=JBTC>
reached a nine-month peak of 1.755 percent on Friday, while
U.S. 10-year yields <US10YT=RR> eased to 3.936 percent, a day
after having nearly retested a 4-1/2 month high of 3.986 percent
set last week.
"The rise in the long-term rates in recent weeks has been a
bit overdone," said Philip Marey, strategist at Rabobank.
"We still expect negative macro-economic data in the next
few months."
DOLLAR STEADIES
The dollar was steadier against a basket of major currencies
on the day, but was poised for its biggest weekly fall in two
months weighed by the twin evils of inflationary fears and
slowing U.S. growth.
In contrast, the euro remained on a solid footing despite
survey data showing very weak growth in the euro zone's services
and manufacturing sectors. See []
"Consumers in the U.S. are already under stress from housing
and now ... we have rising oil prices. Basically, it means
interest rates will remain low in the U.S. despite rising
inflation ... and that is one of the reason why the dollar will
remain weak," said Marcus Hettinger, FX strategist at Credit
Suisse in Zurich.
Against a basket of six major currencies <.DXY>, the dollar
was down nearly 1 percent this week. It was little changed on
the day.
The euro was a touch firmer on the day against the dollar at
$1.5743 <EUR=> and not far off a one-month high of $1.5814
reached on Thursday.
(Additional reporting by Veronica Brown, Toni Vorobyova and
Jamie McGeever)
