(Updates prices throughout, adds ZEW index, fund manager quote)
By Peter Starck
FRANKFURT, May 20 (Reuters) - Equities fell on Tuesday,
ending several days of gains, on fears of rising inflation
driven mainly by high oil prices and a sentiment survey which
pointed to slower growth in Germany.
"Markets are clearly focused on whether inflation pressures
are mounting further," said Philipp Vorndran, investment
strategist at Credit Suisse Asset Management.
The euro climbed to a three-week high against the dollar at
$1.5674 <EUR=> after Wolfgang Franz, the head of Germany's ZEW
think-tank, said he thought the European Central Bank (ECB)
would tighten monetary policy soon.
Franz was speaking after the ZEW investor sentiment index
unexpectedly fell for the second month in a row in May, weighed
down by fears that high inflation and the strong euro will
dampen growth.
"The May ZEW survey remains extremely weak ... confirming
economic slowdown in Germany and in the whole region," JPMorgan
economist Maryse Pogodzinski said in a note.
Europe's benchmark FTSEurofirst 300 index <> extended
losses after the ZEW release to trade down 1.2 percent at 1120
GMT, snapping a four-day winning run.
The MSCI Asia ex-Japan index <.MIAPJ0000PUS> dropped 1.3
percent, having risen for the previous six sessions.
Japan's bellwether Nikkei index <> slipped 0.8 percent
and futures <DJc1> <SPc1> <NDc1> on leading U.S. stock market
indexes <> <.SPX> <> were down around 0.4 perecent
before the start of Wall Street trading.
Stoking the inflation fears, German producer prices (PPI)
rose to a 20-month high of 5.2 percent year-on-year in April,
boosted by surging energy prices, official data showed. Swiss
PPI rose 3.6 percent, also driven by higher commodity prices.
MARGIN SQUEEZE
U.S. PPI for April is due at 1230 GMT. Economists polled by
Reuters expect a rise of 0.4 percent from March.
Higher producer prices would hurt corporate profit margins
on both sides of the Atlantic, analysts said.
"Firms can clearly not put up prices substantially in
response to rising costs in the current demand depleted
environment, and the consequence of this is that margins are
clearly being squeezed," Dutch bank ING said, addressing the
effects of higher producer prices for U.S. companies.
"The need for firms to make cutbacks, and offset margins
contraction will likely exacerbate weakness in an already
softening (U.S.) labour market," ING said in a note.
German brokerage Steubing said the ECB, which unlike the
U.S. Federal Reserve has not loosened monetary policy, was
coming under pressure to raise interest rates.
"This will accentuate the weakness of the U.S. dollar and
given current levels, this will result in a substantial squeeze
of (euro zone companies') profit margins, which are already
under threat from labour costs and commodities," Steubing said.
U.S. crude oil <CLc1> was trading above $127.5 a barrel,
near Monday's record close, spot gold <XAU=> was at $906.45 an
ounce compared with $903.95 on Monday and U.S. wheat futures
<Wc1> rose 1 percent, reflecting the commodity price pressures.
The Bank of Japan (BoJ) on Tuesday kept its key interest
rate unchanged at 0.5 percent as expected. BoJ Governor Masaaki
Shirakawa said there was "a high level of downside risk centring
on the U.S. economy" and that the risk of inflation was rising.
"Inflation will be one of the biggest challenges for stock
markets in the medium to longer term," said Andreas Utermann,
chief investment officer at Allianz Global Investors, which is
neutral equities.
"In the near term, rising long-term interest rates could be
a burden for stocks as market participants have not yet priced
in such a development," Utermann said.
On Tuesday, however, benchmark 10-year Bunds yields fell to
4.207 percent <EU10YT=RR> by 1120 GMT and Bund futures <FGBLc1>
rose to 113.40 from 113.25 at Monday's settlement close.
(Additional reporting by Kevin Plumberg and Alison Leung in
Hong Kong, Chikako Mogi and Eric Burroughs in Tokyo and Michael
Byrnes in Sydney; editing by Ian Jones)
