(Recasts with U.S. markets, adds byline; changes dateline;
previous LONDON)
* U.S. stocks drop as crude oil surges to fresh high
* Dollar tumbles on bearish consumer sentiment data
* European stocks rise as oil drives up energy shares
By Herbert Lash
NEW YORK, May 16 (Reuters) - Oil prices streaked toward
$128 a barrel on Friday, knocking down U.S. stocks and the
dollar, while a slump in U.S. consumer confidence to a 28-year
low added to worries about the health of the U.S. economy.
Gold, a traditional hedge against inflation, broke above a
key psychological level of $900 per ounce for the first time in
three weeks as crude oil surged to a record of $127.82.
U.S. Treasury debt prices rose on a renewed flight to
safety bid in the aftermath of the surprisingly weak sentiment
report, which revived fears U.S. consumer spending may sag
sharply in coming months.
The dollar extended losses against the euro and gave up
gains versus the yen after the Reuters/University of Michigan
Surveys of Consumers said its preliminary index of confidence
fell in May to 59.5, its lowest level since June 1980 -- the
height of U.S. stagflation.
Crude oil prices jumped after Goldman Sachs <GS.N>, the
most active investment bank in energy markets, sharply raised
its forecast for the average price of oil during the second
half of the year to $141 a barrel, from a prior forecast of
$107.
The rise in oil prices drove up shares of energy companies,
helping European stock markets close higher.
The Goldman Sachs oil forecast, however, overshadowed early
optimism in U.S. equity markets following a surprisingly strong
8.2 percent rise in U.S. housing starts in April and as
applications for building permits rose for the first time in
five months, government data showed.
"The obvious impact of higher energy prices is that
consumers have less disposable income and their confidence
drops," said Joe Battipaglia, market strategist at Stifel
Nicolaus in Yardley, Pennsylvania. "Businesses have to pass
along the costs and the result is an inflationary effect."
After midday, U.S. benchmark indexes were down. The Dow
Jones industrial average <> was down 52.76 points, or 0.41
percent, at 12,939.90. The Standard & Poor's 500 Index <.SPX>
was down 3.43 points, or 0.24 percent, at 1,420.14. The Nasdaq
Composite Index <> was down 13.36 points, or 0.53 percent,
at 2,520.37.
Financial shares, led by Citigroup <C.N>, Bank of America
<BAC.N> and Wells Fargo <WFC.N>, were the biggest sector drag
on the benchmark Standard & Poor's 500 Index. Citigroup shares
fell 1.9 percent, while Bank of America fell 1.4 percent, and
Wells Fargo shed 2.1 percent.
Surging oil prices boosted shares of energy companies such
as Exxon Mobil <XOM.N> , which were the top boost to the S&P
500. The S&P index of energy shares <.GSPE> was up 1.5 percent,
while the S&P financial index <.GSPF> fell 1.4 percent.
European shares rose, fed by a rally in energy stocks,
although banks came under pressure and the weak reading in U.S.
consumer sentiment knocked the market back from session peaks.
The FTSEurofirst 300 <> index of top European shares
closed up 0.4 percent to 1,365.2 points, after earlier rising
by as much as 1.2 percent to a four-month high.
Shares of Total, BP and Royal Dutch Shell rose by 1.5
percent to 2.5 percent, making them the three largest positive
influences on the broader market.
Pharmaceuticals put on a strong performance, with France's
Sanofi-Aventis rising 2.2 percent after investors welcomed
positive clinical trial results for its heart drug Multaq.
A decline in bank stocks took some of the luster off the
index, particularly as U.S. stocks slipped into the red.
DOLLAR DOWN ON FEARS OF WEAK ECONOMY
The dollar fell as a plunge in U.S. consumer confidence
raised the possibility of a economic contraction in the second
quarter growth and trimmed the chances of the Federal Reserve
leaving interest rates steady in June.
The dollar fell against major currencies, with the U.S.
Dollar Index <.DXY> down 0.72 percent at 72.808.
The euro <EUR=> rose 0.86 percent at $1.5576, and against
the yen, the dollar <JPY=> fell 0.74 percent at 103.91.
U.S. Treasury debt prices turned higher and Euro zone
government bond futures extended gains after the reading of
U.S. consumer sentiment.
The benchmark 10-year U.S. Treasury note <US10YT=RR> rose
5/32 to yield 3.80 percent. The 2-year U.S. Treasury note
<US2YT=RR> was about break-even, yielding 2.43 percent. The
30-year U.S. Treasury bond <US30YT=RR> rose 16/32 to yield 4.52
percent.
The June Bund future <FGBLM8> rose to 113.50 from 113.40
before release of the data. Two-year yields were little changed
at 4.005 percent <EU2YT=RR>.
Gold jumped to its highest in 3 weeks, with spot gold
prices <XAU=> up $19.50, or 2.21 percent, to $899.95 after
midday.
U.S. crude <CLc1> traded at $126.450, a rise of $2.38. In
London, Brent <LCOc1> was $2.32 higher at $124.95, after
hitting a high of $126.34.
Most stock markets across Asia rose modestly. Tokyo slipped
and Sydney surged back to closing levels last seen in January,
as top miner BHP Billiton <BHP.AX> jumped, propelled by
speculation of Chinese interest in the firm.
Japan's Nikkei average <> retreated 0.2 percent while
MSCI's index of other Asian stock markets <.MIAPJ0000PUS> rose
1.2 percent. Sydney's benchmark S&P/ASX 200 index <>
gained 0.7 percent.
(Reporting by Kristina Cooke, John Parry, Lucia Mutikani and
Nick Olivari in New York and Amanda Cooper in London; Editing
by Leslie Adler)
