By Lincoln Feast
SINGAPORE, Feb 20 (Reuters) - Record prices for commodities
from oil and palladium to soybeans dented demand for shares on
Wednesday amid fears that rising inflation will limit how far
interest rates can be cut to prop a slowing global economy.
U.S. crude oil <CLc1> jumped to an all-time high above $100
on Tuesday, fuelled by expectations that OPEC will not raise
output next month, while supply constraints are also helping
drive up costs of other raw materials.
The spike in prices is a problem for central banks,
including the U.S. Federal Reserve, which are grappling with
falling consumer sentiment and a crunch in credit availability.
"Increasing petrol prices are going to dampen confidence
even further," said Tony Russell, senior equities adviser at
ABN AMRO Morgans in Australia. "Inflation is a major concern
for the various central banks around the world at the moment."
While markets still expect the Fed to lower interest rates
next month, higher prices are threatening further rate cuts.
Lower interest rates generally make stocks more attractive
compared to other assets and reduce companies' borrowing costs.
Japan's Nikkei average <> was down 0.8 percent by 0230
GMT, while MSCI's index of other Asian stocks <.MIAPJ0000PUS>
shed 0.5 percent. The MSCI index is down almost 10 percent so
far this year and 18 percent off its peak in early November.
In contrast, the Reuters-Jefferies CRB index <.CRB>, which
measures a basket of commodities including metals, crops and
energy, jumped to an all-time high on Tuesday and is now up
more than 10 percent this year.
COMMODITY SAFE HAVEN?
"The commodity complex seems to have become a 'safe haven'
of sorts, as investors flee the bond and equity markets," said
Edward Meir, a commentator on metals and energy at New York's
MF Global.
"Whether these gains last remain to be seen, but for now
the less than inspiring U.S. macro backdrop seems to have taken
a back seat to the run we are seeing in commodities."
Precious metal palladium <XPD=> hit a record high, but
sister metal platinum <XPT=> retreated from a 14th straight
record high on Tuesday. Strong demand from China pushed soybean
and soyoil to records in Chicago trade.
The threat of rising prices and the risk it poses for
monetary policy rattled traders in government bonds, with U.S.
Treasuries falling sharply and Japanese government bonds
following suit.
The benchmark U.S. 10-year note yield <US10YT=RR>, which
moves inversely to the price, hit a peak of 3.915 percent
overnight, its highest since early January.
The Japanese equivalent <JP10YTN=JBTC> rose a basis point
to 1.475 percent, while other regional bonds were also
pressured.
"Inflation is all of a sudden highlighted due to oil
prices," said a Korean brokerage trader. "There's still some
buying interest but many investors are nervous to move."
DOLLAR FOLLOWS WALL ST
High oil prices and weakness in U.S. stocks also weighed on
the dollar.
Wall Street gave up early gains as oil peaked at $100.10 a
barrel, with the Dow Jones industrial average <> ending
down 0.1 percent and the tech-heavy Nasdaq <> shedding 0.7
percent. Crude dipped to $99.24 in early Asian trade.
"The impact of high oil prices is filtering through stock
markets and affecting currencies," said a trader at a Japanese
bank.
The dollar traded around 107.90 yen <JPY=>, recovering from
a slide to around 107.20 yen on Tuesday.
The euro <EUR=> was little changed around $1.4730, while
inching up against the yen to 158.90 yen <EURJPY=R>.
Among Asian stock markets, Shanghai <> was up 0.3
percent, but others including Taiwan <>, Hong Kong <>,
South Korea <> and Australia <> all dipped 0.1 to 0.6
percent.
Energy stocks fared well, with Japanese oil explorer Inpex
Holdings <1605.T> up 1.8 percent and Australian oil and gas
producer Woodside Petroluem <WPL.AX> gaining more than 3
percent, despite a fall in second-half profits.
