* Inflation fears, profit jitters boost risk aversion
* MSCI world equity index down 0.6 percent at 354.02
* Oil hits fresh peak above $142 a barrel
* Cautious start for Wall Street seen
(Updates prices, adds comments, changes byline)
By Ian Chua
LONDON, June 27 (Reuters) - Oil extended its rally on Friday
to a new peak above $142 a barrel while global stocks slumped to
three-month lows as investors became increasingly worried about
the outlook for corporate profits and inflation.
Wall Street looked set for a cautious start after Thursday's
slide that sent the blue-chip Dow <> skidding to a 21-month
low.
Fresh data showing surging energy and other raw material
costs putting upward pressure on prices from Germany to Japan
further spurred investors to cut back on risky trades, helping
boost the yen to three-week highs versus the dollar.
"There is a bout of risk reduction across assets ... Oil
prices headed up and that's putting more pressure on equities,"
said Martin McMahon, FX strategist at Credit Suisse in Zurich.
The FTSEurofirst 300 index <> of top European shares
slumped to its lowest level since late October 2005, while the
MSCI main world equity index <.MIWD00000PUS> fell 0.6 percent to
three-month lows, on track for its worst monthly performance in
percentage terms since September 2002.
U.S. stock futures <DJc1><NDc1><SPc1> were all lower.
Earlier, Japanese stocks <> shed 2 percent to a
two-month closing low while speculation of an imminent interest
rate hike in China pushed local shares to a 16-month trough.
The latest round of selling in a global stock markets began
earlier this week when Goldman Sachs urged investors to sell
U.S. bank and automaker shares, forecasting more write-downs for
financial firms like Citigroup <C.N>.
U.S. crude <CLc1> rose more than $2 a barrel to a new
all-time high of $142.26 on Friday, while gold <XAU=> climbed to
a one-month high of $925.30 an ounce as tumbling stocks and a
weaker dollar boosted the metal's safe-haven appeal.
Oil prices have doubled from $70 a year ago on supply
disruptions and geopolitical tensions in the Middle East, while
rising flows of cash into commodities from investors seeking to
hedge against inflation and the weak dollar have added to gains.
The dollar fell 0.1 percent against a basket of major
currencies <DXY>, having earlier carved out a fresh 3-week low
given the gloomy outlook for the U.S. economy. It also plumbed a
three-week low of around 106.17 yen <JPY=>.
INFLATION PICTURE WORSENING
Safe-haven government bonds mostly erased early gains,
pushing yields slightly higher on expectations that central
banks will be forced to lift rates to fight inflation.
The U.S. two-year yield <US2YT=RR> climbed 1 basis point to
2.68 percent, while the two-year Schatz yield <EU2YT=RR> was
little changed at 4.43 percent.
Data from five German states so far showed inflation in
Europe's biggest economy likely accelerated in June.
Separate reports showed French producer prices posting their
biggest jump in almost a decade in May, Spanish consumer
inflation hit an 11-1/2 month high in June, while Japan's annual
consumer inflation accelerated to a new decade-high of 1.5
percent in May.
The inflation picture is worse in emerging markets, where
countries like Vietnam and India are already experiencing
double-digit inflation.
"The macroeconomic environment has turned far more
challenging for EM policymakers. Slowing growth and accelerating
inflation create a tough policy backdrop," Lehman Brothers said
in a note to clients.
"Central banks are raising rates and could easily err by
being too hawkish or too dovish. There is a rising risk of
policy mistakes. Political pressures to intervene in markets are
growing, potentially creating long-term distortions and
weakening fiscal frameworks."
The European Central Bank is likely to become the first G7
central bank to raise interest rates next week, pushing the cost
of borrowing to 4.25 percent.
(Additional reporting by Natsuko Waki and Toni Vorobyova)
