(Adds close of U.S. markets)
By Herbert Lash
NEW YORK, May 9 (Reuters) - Oil's relentless surge to a
fresh high on Friday stoked worries about the economy and
pressured stock markets in the United States and Europe, while
a $7.8 billion loss at AIG, the world's largest insurer,
rekindled fears that the credit crisis is not over.
Oil rose to over $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 U.S. insurer American International
Group <AIG.N> reported its record quarterly loss late on
Thursday.
AIG wrote down assets linked to subprime mortgages and also
said it would raise $12.5 billion in new capital to strengthen
its balance sheet.
News on Friday that Citigroup <C.N>, the top U.S. bank,
plans to shed $400 billion in assets also pressured the
financial sector.
"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,
or 0.94 percent, at 12,745.88. The Standard & Poor's 500 Index
<.SPX> declined 9.40 points, or 0.67 percent, at 1,388.28. The
Nasdaq Composite Index <> fell 5.72 points, or 0.23
percent, at 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. Citigroup was the second
most actively traded share on the New York Stock Exchange, and
AIG was the third.
Despite the higher crude oil prices, Exxon Mobil <XOM.N>
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.
The FTSEurofirst 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 <.SX7P> fell 1.7
percent, bringing this week's decline to 3.7 percent.
Societe Generale <SOGN.PA>, BNP Paribas <BNPP.PA> and
Barclays <BARC.L> each lost between 2 percent and 2.5 percent.
French drugmaker Sanofi-Aventis <SASY.PA> 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.
WORRIES BOOST GOVERNMENT DEBT
The renewed credit worries, prompted by the loss at AIG,
boosted the appeal of safe-haven government debt on both sides
of the Atlantic. The sagging stock markets helped bolster
low-yielding currencies such as the yen and led the dollar to
fall against most currencies on a rise in risk aversion and
heightened concern about the health of the U.S. economy.
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 which 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 <CLc1> settled up $2.27
at $125.96 a barrel before rising to a record $126.25 in late
post-settlement trade. London Brent crude <LCOc1> 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.
The dollar fell against major currencies, with the U.S.
Dollar Index <.DXY> down 0.57 percent at 73.048.
The euro <EUR=> rose 0.47 percent at $1.5478, and against
the yen, the dollar <JPY=> fell 0.72 percent at 102.98.
U.S. Treasury debt prices rose.
U.S. Treasury debt prices were mixed, with longer-dated
securities rising and short-maturity notes falling.
The benchmark 10-year U.S. Treasury note <US10YT=RR> rose
1/32 to yield 3.78 percent. The 2-year U.S. Treasury note
<US2YT=RR> fell 2/32 to yield 2.25 percent. The 30-year U.S.
Treasury bond <US30YT=RR> gained 8/32 to yield at 4.53.
Gold also finished up on the back of record crude oil, as
the surge boosted gold's appeal as a hedge against inflation.
Gold has traded in lock-step with movement in the energy
market, which it has dramatically underperformed.
The June contract <GCM8> for gold in New York settled up
3.70 at $885.80 an ounce.
Resurgent oil surge weighed on Asian shares and earnings
worries highlighted by Toyota comments pressured Japanese
exporters, sending Tokyo's Nikkei average <> down 2
percent.
Shares across the rest of Asia <.MIAPJ0000PUS> fell 0.5
percent.
(Reported by Jennifer Coogan, Richard Leong, Nick Olivari in
New York and Amanda Cooper, Atul Prakash, Santosh Menon and
Kirsten Donovan in London; Editing by Leslie Adler)
