Oil hovers above $120; stocks and euro fall

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Brent crude prices hovered close to 32-month highs on Tuesday as markets focused on fears that unrest in producer states in Africa and the Middle East could disrupt supply, while stocks snapped a five-day winning streak.

The euro pulled back from a five-month high against the dollar, hurt by a one-notch downgrade of Portugal’s credit rating by Moody’s Investors Service, which said the country’s incoming government would need to seek financial aid.
Portuguese government bond yields traded around euro lifetime highs.

Investors’ assessment whether the single currency can make fresh gains given that market players have already positioned themselves for interest rate rises in the euro zone during 2011 also put pressure on the euro, which has risen 6,1% against the dollar and 10,2% versus the yen this year.

“There is a lot of good news priced into the euro already and (ECB President Jean-Claude) Trichet will have to support the rate view to keep the positive momentum,” said Niels Christensen, currency strategist at Nordea in Copenhagen.

The European Central Bank is widely expected tomorrow to raise rates by 25 basis points from a record low of 1% to tame inflationary pressures.

The euro was down 0,2% at $1,4194, off a five-month high of $1,4268 hit on Monday, while the dollar was up 0,1 % against a basket of major currencies.

Federal Reserve Chairman Ben Bernanke said late on Monday that the recent spike in inflation was unlikely to persist.

But a sustained higher oil price could pose a serious threat to the global economic recovery and dampen risk appetite, and commodity price pressures saw silver rise to a 31-year high.

“It’s interesting that the recent rally in oil has had virtually no impact on equities. It was just over a month ago where equities markets were nervous about the impact of oil prices on the economy,” Deutsche Bank strategist Jim Reid said in a note.

“The difference this time is that the rise has likely been due to decent growth rather than immediate geopolitical concerns. Nevertheless one would expect the creeping price of oil to start to get more attention given the recent rally.”

World stocks measured by MSCI All-Country World Index slipped 0,2% after hitting six-week highs in the previous session, while emerging market shares were flat.

In Asia, Japan’s Nikkei average lost 1,1% with investors still wary about the long-term impact of last month’s massive earthquake and tsunami and a resulting nuclear accident that workers are still struggling to contain.

Brent stayed above $120 per barrel, easing 0,2% after hitting a 32-month high of $121,29 on Monday as Nigerian election delays and a short-lived strike in Gabon added to supply jitters for a market already on edge over fighting in Libya and unrest in Yemen, which borders top producer Saudi Arabia.

Silver rose to $38,77 an ounce, its highest since early 1980, while gold was steady at $1 437, 77 an ounce.

Copper ended a two-day losing run, up 0,7%.
Yields on Portugal’s 10-year government bonds steadied at 8,867%, while Portuguese stocks fell 0,1%, slightly underperforming the broader FTSEurofirst 300 index, which was up 0,1%.