By Jeremy Gaunt, European Investment Correspondent
LONDON, July 1 (Reuters) - The second half of 2008 got off
to a brutal start for equity investors on Tuesday as worries
about the banking sector battered European stocks while
inflation fears increased with oil over $142 a barrel.
Wall Street also looked set for a poor start.
A sell-off in banks hit European shares with the
FTSEurofirst 300 index <> down 1.9 percent
Deutsche Bank <DBKGn.DE> shed 5 percent amid market talk of
a profit warning. Deutsche declined to comment. UBS <UBSN.VX>
traded 6.4 percent lower as Merrill Lynch removed the stock from
its "Europe 1 List".
"It's a combination of profit warning talk at Deutsche,
rumours late yesterday of writedowns at UBS -- now trading below
the rights price -- and the Lehman rumours in the United
States," said a trader in London.
Lehman Brothers <LEH.N> shares fell sharply on Monday on
speculation that the investment bank could be bought for $15 a
share, a price well below current market levels. Lehman declined
to comment.
It was a poor start to the second half after the battering
during the first six months of the year. The U.S. S&P 500 index
<.SPX>, for example, ended the first half of the year down
nearly 13 percent while the FTSEurofirst 300 lost 20 percent and
Japan's Nikkei <> was down 18 percent.
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"There are no reasons to own shares at the moment," said
asset manager Stefan de Schutter at Alpha Trading in Frankfurt.
"Oil is still very high and the banking crisis is continuing."
Earlier, on Tuesday the Nikkei dipped just 0.1 percent, but
set its longest losing streak in nearly four years.
RISING TENSION
Tension between the United States and Iran pushed oil to
near record levels, adding to overall anxiety about slowing
economic growth and rising prices. New York crude oil was up
$2.18 a barrel <CLc1> at $142.17. It hit a record high above
$143 on Monday before falling back at the close.
In a war of words between the Iranian and U.S. military,
Iran's Revolutionary Guard said Tehran would impose controls on
shipping in the Gulf and Strait of Hormuz if it were attacked.
The U.S. Navy's Fifth Fleet said the United States and its
allies would not allow Iran to hamper shipping in the Gulf.
Roughly 40 percent of the world's traded oil moves through the
strait.
"The market has been worried about the tensions involving
Iran and that remains a supportive factor for the oil price,"
said David Moore, a commodities analyst at the Commonwealth Bank
of Australia in Sydney.
Oil, which is up around 47 percent so far this year, has
added to overall fears on financial markets that inflation is
about to rise substantially just as developed economies are
slowing.
DOLLAR WEAK, BONDS MIXED
The dollar eased a half of a percent against the yen <JPY=>
to 105.50 yen, a factor in the Nikkei's slide because of the
effect on importers. It was also weaker against the euro <EUR=>
at $1.5755.
French President Nicolas Sarkozy said on Monday that the
euro was 30 percent overvalued and that interest rate increases
would have a limited effect on inflation as they would make no
difference to the crude price.
Yields on two-year euro zone government bonds were down 3
basis points at 4.581 percent <EU2YT=RR> while the 10-year Bund
was yielding 4.611 percent <EU10YT=RR>, around 2 basis points
less than in late Monday trade.
