(Adds detail, quotes, updates prices)
By Tom Miles
HONG KONG, May 22 (Reuters) - Skyrocketing oil prices at a
record $135 a barrel on Thursday re-kindled fears of
1970s-style stagflation, pushing Asian shares down for a third
straight day and pinning the dollar near 1-month lows against
the euro.
Investors rushed out of shares but also stayed away from
safe-haven bonds, after the Federal Reserve slashed the U.S.
2008 economic growth forecast and warned of higher
unemployment.
Minutes from the Federal Reserve's April 29-30 policy
meeting warned of mounting concerns over inflation, making
further interest rate cuts unlikely. []
"The Fed is in a difficult position now because it's not
the U.S. economy that is driving inflation but the Chinese,"
said Damien Boey, equity strategist at Credit Suisse First
Boston in Australia.
"So we end up with the situation where rather than
inflation being a sign of strong demand, inflation actually
eats into the consumer purchasing power."
The euro <EUR=>, aided by a surprise improvement in German
business sentiment, rose above $1.5800 to hit a one-month high.
[]. Against the yen <JPY=>, the dollar plumbed its
lowest in 10 days, moving as low as 102.7 yen.
"With the Dow stock average falling sharply for two days in
a row, investors have felt reluctant to take risks," said a
currency trader at a Japanese bank.
The dollar's weakness only added to the appeal of crude oil
<CLc1>, which powered to a fresh record of $135.04 a barrel
after U.S. stocks of crude oil, which analysts had expected to
swell by 600,000 barrels in the week to May 16, instead dried
up to the tune of 5.4 million barrels, reaching 320.4 million.
[]
"The huge draw in crude inventories was surprising. All
focus is on bullish factors. You simply have to follow the
trend and buy now," said Tatsuo Kageyama, an analyst at Kanetsu
Asset Management in Tokyo.
"You really cannot forecast how much further the market
will rally now. All I can say is the market will continue to
rise," Kageyama said.
The strong demand for oil and fear of inflation has spurred
buying of gold <XAU=>, which nosed above $935 an ounce for the
first time in a month before retreating to $932. Gold gained a
record $1,000 lustre earlier this year as the equity market
slumped but it fell back below $850 after the panic subsided.
BUFFETTED
The Fed's warning and the oil price surge cut the legs from
May's stock market rally and saddled U.S. stocks with their
worst losses in two weeks.
The Dow Jones industrial average <> fell 1.8 percent
and the Standard & Poor's 500 Index <.SPX> slipped 1.6 percent.
The S&P Financials sub-index <.GSPF> lost 2.8 percent, its
worst performance in a month.
Japan's Nikkei average <> was 1.0 percent lower by
0353 GMT. Stocks across the rest of Asia, gauged by the MSCI
index <.MIAPJ0000PUS>, declined 1.1 percent. The index has
fallen for the third consecutive day.
The oil surge favoured energy firms such as Nippon Oil
<5001.T>, which rose 3.5 percent, but sent fuel-dependent
airlines into a tailspin. Cathay Pacific <0293.HK> skidded 2.3
percent, Qantas <QAN.AX> dropped 4.6 percent and Korean Air
<003490.KS> plummeted 5.5 percent.
Investors also shunned Japanese government bonds, which
slipped after three days of gains because of the mounting
inflation threat from oil prices.
"We are moving away from stagflation to inflation," said
Freddy Lim, chief Japan fixed-income strategist at Morgan
Stanley. "The better the Fed is at forestalling a further
crisis, the worse it is for inflation. People are talking about
this a lot and are very concerned."
Prices for benchmark 10-year Japanese government bonds
<2JGBv1>, which had rebounded in the past week after a
two-month slump, fell a full point to 134.80 after a
disappointing Bank of Japan buying operation flushed unwanted
bonds into the market.
Fretful investors got little comfort from Warren Buffett,
the world's richest person, who said that the economic pain was
likely to run for a while longer and could get worse.
"I think the tidal wave that hit various financial
institutions since last August has largely been recognised and
felt," Buffett told a news conference in Madrid at the end of a
European tour.
"In terms of the effect on the economy in the United
States, we don't know, but I think it will be longer and deeper
then many people do. There could well be a lot to come."
But he said that for banks at least the worst was probably
behind them after the Federal Reserve staved off "really
contagious financial panic" with its intervention to prop up
investment bank Bear Stearns <BSC.N>.
