* Oil tops $71 after large drop in U.S. crude inventories
* US dollar recovers vs euro after Russia Treasury comment
* Yield on 10-year U.S. Treasury note rises to 4.0 pct
* U.S. stocks slip on fears oil's climb may harm recovery
(Adds close of U.S. markets activity)
By Herbert Lash
NEW YORK, June 10 (Reuters) - Oil surged to almost $72 a
barrel on Wednesday after a surprise drop in U.S. inventories,
helping U.S. stocks slide as investors worried higher crude
prices may fuel inflation and hamper a recovery.
The U.S. dollar rose against the euro and the yen after the
government sold $19 billion in 10-year notes, easing fears
about the U.S. ability to finance a ballooning budget deficit.
But U.S. government debt prices fell, sending benchmark
yields to an eight-month high of 4.0 percent after the auction
heightened bond market concerns about the deficit.
The auction was the first test of the government's
long-term borrowing ability since investors began to question
in May whether the United States' prized AAA credit rating may
be living on borrowed time because of the deficit.
U.S. stocks, meanwhile, fell on worry that rising interest
rates could dampen consumer and business spending just as the
economy appears poised for recovery.
"This whole platform in trying to stem this recession is
based on large funds, government intervention and lower rates,"
said Steve Goldman, market strategist at Weeden & Co in
Greenwich, Connecticut.
"It probably hasn't crossed over to where stocks will
reverse, but it makes for some hesitation as you start seeing
rates getting closer to crossing over 4 percent."
Stocks in sectors sensitive to interest rates, such as
homebuilders and financials, were among the primary laggards.
The Dow Jones U.S. Home Construction index <.DJUSHB> was off
1.5 percent and the S&P Financial index <.GSPF> down 1.6
percent.
The Dow Jones industrial average <> closed down 24.04
points, or 0.27 percent, at 8,739.02. The Standard & Poor's 500
Index <.SPX> fell 3.28 points, or 0.35 percent, at 939.15. The
Nasdaq Composite Index <> slipped 7.05 points, or 0.38
percent, at 1,853.08.
Oil rose after the U.S. Energy Information Administration
reported nationwide stockpiles fell by a larger-than-expected
4.4 million barrels last week as imports dropped by 676,000
barrels per day. []
U.S. crude for July delivery <CLc1> rose $1.32 to settle at
$71.33 a barrel after hitting a peak of $71.79 earlier in the
session -- the highest since Oct. 22. London Brent <LCOc1> rose
$1.58 to $70.80 a barrel.
"The number that kind of stands out right away is the drop
in crude oil imports," said Gene McGillian, analyst at
Tradition Energy in Stamford, Connecticut. "If imports are
going to drop, we're going to see some of the stockpiles
erased."
Gains in crude prices and other commodities helped to
initially underpin global equity markets on hopes economic
activity was picking up.
Chinese media reported the nation's industrial production
rose 8.9 percent in May -- far more than expected -- hurting
demand for safe-haven assets like debt and initially gold.
Russia pledged to cut the share of U.S. Treasuries in its
$400 billion reserves, although it said the move would be
gradual and only replace bonds as they expire. []
The comments by a senior Russian central bank official
weighed on bond prices and initially spurred the euro to a high
of $1.4145 before it fell on profit-taking.
The dollar rose against a basket of major currencies, with
the U.S. Dollar Index <.DXY> up 0.49 percent at 80.234.
The euro <EUR=> fell 0.55 percent at $1.3987. Against the
yen, the dollar <JPY=> gained 0.88 percent at 98.26.
Economic news across the world was mixed. Two reports
raised prospects that the British economy could already be out
of recession, but manufacturing news from Japan and France
suggested the hard-hit sector is still suffering.
British industrial output rose 0.3 percent in April -- its
first increase since February 2008 -- official data showed, and
the economy grew during the month for the first time in just
under a year and continued to expand in May, a think tank said.
[][]
But French factory output fell 1.4 percent in April, more
than expected, highlighting the extent to which the global
recession has hit European industry after worse-than-expected
German output figures came out on Tuesday. []
In Japan core private-sector machinery orders slid an
unexpected 5.4 percent in April, a sign that firms are not
confident that a bounce in industrial output and exports will
be enough to resume capital investment. []
The pan-European FTSEurofirst 300 <> index closed up
1.2 percent at 879.98 points.
The benchmark 10-year U.S. Treasury note <US10YT=RR> fell
22/32 in price to yield 3.95 percent. The 2-year U.S. Treasury
note <US2YT=RR> fell 3/32 in price to yield 1.36 percent.
Gold futures erased initial gains to finish flat on the
dollar's bounce and signs of lagging physical jewelry demand
U.S. August futures <GCQ9> settled unchanged at $954.70 an
ounce in New York.
Asian shares rallied overnight as the reports of Chinese
industrial output raised optimism about the global economy.
The MSCI index of Asia Pacific stocks outside Japan
<.MIAPJ0000PUS> rose 3.2 percent, and Japan's Nikkei share
average <> climbed 2.1 percent.
(Reporting by Edward Krudy, Steven C. Johnson, Ellen Freilich
in New York; Joanne Frearson, George Matlock, David Sheppard
and Kylie MacLellan in London; writing by Herbert Lash, Editing
by Chizu Nomiyama)
