(Adds close of U.S. markets)
* Oil retreats after hitting new high above $135 a barrel
* Stocks rise in light trade as inflation worries rise
* Dollar gains on surprise drop in U.S. jobless claims
By Herbert Lash
NEW YORK, May 22 (Reuters) - Oil retreated from its lofty
new peak above $135 a barrel on Thursday, encouraging a small
rally in global stocks supported by investors made more
inflation-wary after crude's powerful surge this week.
Euro zone and U.S. government bond prices fell as fixed
income investors also maintained their caution despite drops in
commodity prices during the day.
The recent rise of commodity prices along with
better-than-expected economic data this week in Europe and the
United States shifted the focus of investors squarely on to
inflation.
The dollar rose, boosted by a surprise drop in U.S. jobless
claims. Still, support was fragile as record high oil prices
stoked worries about the health of a flagging U.S. economy.
Oil initially hit new peaks for a third straight day,
touching an all-time high of $135.14 in London and a record
$135.09 in New York before losing steam in response to a
stronger dollar.
Worries that the recent jump in oil prices would slow the
economy pushed bond yields up and prices down sharply. The
30-year U.S. Treasury bond <US30YT=RR> fell nearly two points
in price and the euro zone's two-year Schatz <EU2YT=RR> yield
pierced 4.2 percent for the first time since mid-October. The
yield, which moves inversely to price of the 30-year bond, rose
to 4.66 percent from 4.54 percent late Wednesday.
"Inflation is currently driving the market," said Bob Maes,
a fixed-income strategist at KBC in Brussels.
U.S. stocks rebounded modestly from two straight days of
steep declines following a proposed major acquisition in the
utilities sector and a sign of strength in the jobs market.
Equity investors saw it as positive that the number of U.S.
workers filing initial claims for jobless benefits unexpectedly
fell 9,000 last week to 365,000, the U.S. Labor Department
said. However, the overall number of workers on the benefit
rolls held at a four-year high.
U.S. financial shares snapped back after suffering their
biggest drop in a month on Wednesday amid a growing view that
the Federal Reserve is done cutting interest rates.
Despite the slightly better economic news, oil's rise cast
a long shadow over stock markets that had been on the verge of
erasing this year's losses before this week's fresh slide.
"It's very hard to make the case that with oil at $135 a
barrel, it's not going to have a significant impact on the U.S.
economy," said Hugh Johnson, chief investment officer of
Johnson Illington Advisors, in Albany, New York.
"That has to raise lots of worries among investors who care
so much about the economy and earnings," he said.
The Dow Jones industrial average <> gained 24.43
points, or 0.19 percent, at 12,625.62. The Standard & Poor's
500 Index <.SPX> rose 3.59 points, or 0.26 percent, at
1,394.30. The Nasdaq Composite Index <> added 16.31
points, or 0.67 percent, at 2,464.58.
JPMorgan <JPM.N> shares rose 1.93 percent to $43.24 percent
and Citigroup <C.N> gained 2.56 percent to $21.60, making them
the top two biggest contributors to the S&P's advance.
European shares ended higher, lifted by telecom stocks and
by banks that gained on consolidation talk, while Britain's
blue-chip share index edged down in a volatile session.
The pan-European FTSEurofirst 300 <> index of top
European shares ended 0.3 percent higher at 1,345.11 points,
with telecoms contributing the most to the rise.
In London, the FTSE 100 <> closed down 0.3 percent at
6,181.6, its lowest closing level in three weeks.
"With oil prices moving higher and inflation expectations
also rising, these are having an impact on the short-end of the
European bond market in particular and the yield curve is
becoming flatter every day," said KBC's Maes.
U.S. crude <CLc1> settled down $2.36 at $130.81 a barrel,
while London Brent crude <LCOc1> fell $2.30 to $130.40.
The benchmark 10-year U.S. Treasury note <US10YT=RR> fell
30/32 to yield 3.92 percent, while the 2-year U.S. Treasury
note <US2YT=RR> fell 9/32 to yield 2.55 percent.
The dollar rose against major currencies, with the U.S.
Dollar Index <.DXY> up 0.51 percent at 72.262 and against the
yen, it rose 1.24 percent at 104.24.
The euro <EUR=> was down 0.54 percent at $1.5703.
U.S. gold futures ended 1 percent lower with the June gold
contract <GCM8> in New York settling down $10.30 at $918.30.
Japan's Nikkei average <> clawed its way into positive
territory, erasing a 2 percent decline, spurred by the launch
of a domestic fund and buying of energy-related stocks. The
Nikke closed up 0.4 percent.
Stocks elsewhere in Asia, gauged by the MSCI's Asia
ex-Japan index <.MIAPJ0000PUS>, declined 0.9 percent.
(Reporting by Jennifer Coogan, John Parry and Steven C.
Johnson in New York and Ikuko Kao, Lewa Pardomuan, Dominic Lau,
Ian Chua and Sitaraman Shankar in London)
(Reporting by Herbert Lash. Editing by Richard Satran)
