An unanticipated fall in U.S. crude oil stockpiles pushed oil prices to new highs on Wednesday.  --  "NYMEX August West Texas Intermediate added $2.60 to close at $143.57 a barrel," the Financial Times of London reported.  --  "ICE August Brent rose $3.59 on the day to settle at $144.26 a barrel."  --  Gasoline supplies rose slightly, however, "suggesting consumer demand was weakening," Robert Cookson said.  --  Increasingly belligerent rhetoric in Israel and Iran and news of covert warfare waged by the U.S. against the Islamic Republic are also factors.  --  Combined with fears that General Motors may succumb to bankruptcy, the continued rise of oil prices pushed U.S. stock markets into "bear territory," more than 20% below their October highs, AP reported.[2]  --  GM "closed below the $10 mark for the first time since September 1954 when Dwight Eisenhower was president," Tim Paradis said.  --  With gasoline at a record U.S. high of $4.092 nationally, "Wall Street is worried that rising energy prices are causing consumers to pare their spending in other areas."  --  In another sign of pessimism, "Blockbuster Inc. said it is withdrawing its proposal to buy Circuit City Stores Inc.  Blockbuster said the proposed deal, at a price of more than $1 billion, didn't make sense because of market conditions."  --  Similar situations can be seen in equity markets around the world, Sarah O'Connor of the Financial Times noted:  "In Asia, Europe, and the U.K. the combination of commodity-led inflation and slowing growth took its toll yet again.  The Nikkei 225 fell for the 10th day in a row — its longest losing streak in 43 years — while the FTSE Eurofirst 300 shed 0.7 per cent and the FTSE 100 lost 1 per cent."[3] ...

1.

Markets

FALL IN SUPPLIES SENDS OIL PRICE CLIMBING
By Robert Cookson

Financial Times (London)
July 2, 2008

http://www.ft.com/cms/s/0/e8ff2684-4827-11dd-a851-000077b07658.html

Oil prices rose close to record levels on Wednesday after data showed U.S. crude stockpiles fell much more than expected last week.

Commercial inventories of crude oil fell by 2m barrels to 299.8m barrels last week, down from 353.9m barrels a year ago, as imports slowed and refinery demand rose.

However, petrol supplies rose more than expected, up 2.1m barrels to 210.9m barrels, suggesting consumer demand was weakening.

Kyle Cooper, an energy analyst at IAF Advisors in Houston, said : “It shows that Americans are changing their driving habits, as we are dealing with record high gasoline prices.”

NYMEX August West Texas Intermediate added $2.60 to close at $143.57 a barrel. ICE August Brent rose $3.59 on the day to settle at $144.26 a barrel.

NYMEX August heating oil climbed 11.24 cents to $4.05 a gallon after stockpiles of distillate fuel, which includes diesel and heating oil, rose less expected, by 1.3m barrels to 120.7m barrels.

Robert Zoellick, the president of the World Bank, said an increase in production from the main oil exporters “will be constructive” to ease current record prices.

Tension in the Middle East has been supporting the oil price in recent weeks, with mounting worries that Israel was preparing a strike on Iran’s nuclear facilities.

The Iranian oil minister said Iran would react “fiercely” to any attack, which he warned would trigger a surge in crude prices. When asked whether his country, the world’s fourth-biggest oil exporter, would stop exports as a result of an attack, oil minister Gholam Hossein Nozari replied: “Iran has been always a reliable source of supply to the market and Iran remains a supplier for ever.”

The comments did little to soothe market jitters, especially after the commander of Iran’s Revolutionary Guards said earlier in the week that Iran would respond to an attack by imposing controls on shipping in the Strait of Hormuz, a waterway used by 40 per cent of seaborne oil trade.

Nauman Barakat, of Macquarie in New York, said the rhetoric between Iran and Israel is likely to intensify. “The market is nervous as there is no way that Iran’s exports of around 3m barrels a day can be replaced by other sources,” he said.

Oil traders were keeping an eye on the weather after the U.S. National Hurricane Center said a strong tropical wave over the far eastern Atlantic had the potential to become a tropical depression over the next couple of days.

However, in Europe, coal and power prices fell sharply after hitting record highs earlier in the week.

Soya bean prices hovered within a whisker of record highs as traders worried about dwindling stores in the U.S., the world’s largest producer.

In Chicago, soyabeans for August delivery were down 2¼ cents to $16.20½ a bushel, after hitting an all-time high of $16.36¼ earlier in the session.

Soya bean prices have risen sharply since Monday when the U.S. Department of Agriculture said soya bean stocks were tight and farmers had planted less of the crop than forecast. Severe flooding in the U.S. Midwest last month has amplified fears about a poor harvest.

Meanwhile, CBOT September corn was 11¼ cents higher at $7.43¾ a bushel, while CBOT September wheat rose 6¾ cents to $8.71½ a bushel.

2.

STOCKS DROP AFTER NEW RECORD FOR OIL PRICES
By Tim Paradis

Associated Press
July 2, 2008

http://ap.google.com/article/ALeqM5gHs5OM3gFG_DytQQZFbWfgPT08MAD91LVK9O5

NEW YORK -- Wall Street resumed its sell-off Wednesday after oil hit a new record and a bearish analyst report renewed concerns that General Motors Corp. could run out of cash.

The stock market's pullback, which accelerated in the final hours of the week's last full trading session, left the Dow Jones industrial average officially in bear market territory, with the blue chips having fallen more than 20 percent from their October highs.

Oil surged to new records above $144 a barrel as the government reported a bigger-than-expected drop in U.S. supplies and as investors worried about tensions in the Middle East.

Fears that GM could go so far as to declare bankruptcy only added to investors' unease. The stock closed below the $10 mark for the first time since September 1954 when Dwight Eisenhower was president. Investors shrugged off better-than-expected sales figures from June and fretted about the company's cash needs.

The Dow fell 166.75, or 1.46 percent, to 11,215.51, the lowest close since August 2006. It now stands 20.82 percent below its Oct. 9, 2007 record of 14,164.53 . The last bear market ended in October 2002.

Broader stock indicators also posted big losses after showing gains for much of the morning. The Standard & Poor's 500 index fell 23.39, or 1.82 percent, to 1,261.52, while the technology-laden Nasdaq composite index fell 53.51, or 2.32 percent, to 2,251.46.

The S&P is just shy of the 20 percent pullback that signals a bear market. While the Nasdaq is also in bear territory, it hit that mark in March, moved higher and has now returned to a bear level.

Bond prices rose as investors exited stocks. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.96 percent from 4.01 percent late Tuesday. The dollar was mixed against other major currencies, while gold prices rose.

Wall Street is worried that rising energy prices are causing consumers to pare their spending in other areas.

Gasoline prices hit a fresh high ahead of the July 4th holiday weekend, increasing half a penny to a new national record of $4.092 a gallon on average, according to AAA, the Oil Price Information Service and Wright Express.

Crude oil hit a record $144.32 a barrel in after-hours trading after reaching a record settlement of $143.57, an advance of $2.60 on the New York Mercantile Exchange. The Energy Department reported Wednesday that U.S. crude oil supplies fell more than expected last week.

Businesses are also struggling with elevated energy costs, and demand is weakening for autos, heavy machinery, and steel. The Commerce Department said Wednesday that factory orders rose by 0.6 percent in May. The result was in line with a consensus of Wall Street economists surveyed by Thomson Financial, but was much smaller than the gain of 1.3 percent for April.

Traders were cautious ahead of the three-day weekend. The stock market closes three hours early, at 1 p.m. EDT, on Thursday before the Fourth of July holiday on Friday.

"It's your typical holiday week for the summer time," said Stephen Carl, principal and head of equity trading at The Williams Capital Group in New York. "I think we're all familiar with the economic problems out there," he said, and given how weak stocks have been, the market is "staying the course."

Lately, that course has been a downward one. Though stocks mostly posted modest gains in the first two sessions of the week, Wall Street saw a steep sell-off last week. The Dow lost 4.2 percent by Friday while the S&P and Nasdaq fell more than 3 percent amid concerns about the ability of the economy to move ahead with energy prices racing higher.

While Thursday's session is a shortened one, it could bring added insights into the well-being of consumers and the overall economy. The government's June employment report is due and is expected to show the sixth month of jobs losses but a slight improvement in the unemployment rate. Employment is crucial because consumer spending accounts for more than two-thirds of U.S. economic activity.

With concerns about rising energy prices, falling home values and a jittery Wall Street, Harry Clark, president of Clark Capital Management in Philadelphia, contends that many average investors have already pulled their money from the markets.

"I don't think this is an investors' market right now," he said. "I think there is a lot of money on the sidelines and once you get some kind of good catalyst -- anything to make the market look better -- they'll come rushing into the market."

Clark said Thursday's employment report could show that the economy is holding up better than some investors have predicted.

"I still think it's going to be negative but not as negative as people are expecting," he said. "Things aren't as bad as people think they are. We're talking ourselves into a market decline and a recession."

In corporate news, GM fell in part after a Citi Investment Research analyst cited liquidity concerns in slashing his price target on GM stock to $14 from $21. While he said the company isn't likely facing an immediate cash shortage, the concerns from 2008-09 have grown in recent months. The stock fell $1.77, or 15 percent, to $9.98 a day after jumping 12 percent on a better-than-expected sales report.

Microsoft Corp. has approached other media companies about a bid to acquire Yahoo Inc., according to a report in the Wall Street Journal. Yahoo rose 68 cents, or 3.4 percent, to $20.88, while Microsoft fell 99 cents, or 3.7 percent, to $25.88.

Blockbuster Inc. said it is withdrawing its proposal to buy Circuit City Stores Inc. Blockbuster said the proposed deal, at a price of more than $1 billion, didn't make sense because of market conditions. Blockbuster jumped 14 cents, or 5.6 percent, to $2.65, while Circuit City fell 23 cents, or 9 percent, to $2.32.

The Russell 2000 index of smaller companies fell 19.25, or 2.78 percent, to 672.34.

Declining issues outpaced advancers by nearly 3 to 1 on the New York Stock Exchange, where consolidated volume came to 5.15 billion shares, compared with 5.75 billion shares traded Tuesday.

Overseas, Japan's Nikkei stock average fell 1.31 percent. Britain's FTSE 100 fell 0.98 percent, Germany's DAX index slipped 0.17 percent, and France's CAC-40 fell 1.03 percent.

3.

Market

Equities

RESURGENT OIL KNOCKS THE WIND OUT OF INVESTORS
By Sarah O'Connor

Financial Times (London)
July 2, 2008

http://www.ft.com/cms/s/0/ea75e43e-4864-11dd-a851-000077b07658.html

Equity markets slumped on Wednesday and with oil at a fresh record high, the S&P 500 closed below its March low, as bruised investors awaited important interest rate and jobs data on Thursday.

The spike in oil to a record close of $143.57 a barrel, on the back of lower-than-expected U.S. crude reserves, and a rise above $144 in after-hours trade sparked late selling on Wall Street.

The rise in crude fuelled fears of rising inflation and stalling growth. “The vicious interplay between crude oil and stock markets carries on,” said Francesco Garzarelli at Goldman Sachs.

The late slide in stocks pushed both the Dow Jones Industrial Average and Nasdaq officially into bear market territory. The Dow fell 1.5 per cent, and has fallen more than 20 per cent from its record closing high in October.

In Asia, Europe, and the U.K. the combination of commodity-led inflation and slowing growth took its toll yet again. The Nikkei 225 fell for the 10th day in a row -- its longest losing streak in 43 years -- while the FTSE Eurofirst 300 shed 0.7 per cent and the FTSE 100 lost 1 per cent.

“Sentiment is getting to be as bearish as in the second half of 2002. There is no interest from clients in trying to call a bottom to this,” said Graham Secker at Morgan Stanley, who thinks shares need to fall another 5-10 per cent before turning a corner. “Equity markets would be helped if central banks were willing to look beyond near-term inflationary pressures and ease interest rates,” he added.

Equity investors now face key U.S. job data on Thursday that should give an indication of how the ailing U.S. economy is faring.

Hopes, however were not high on Wednesday after a less important survey showed private sector companies cut almost four times as many jobs as analysts expected in June. That data sent the dollar falling 0.5 per cent against a basket of six major currencies and to a 10-week low against the euro.

Further pressure on the dollar may beckon as the European Central Bank is widely expected to raise rates on Thursday. Eurozone producer price inflation data on Wednesday cemented those expectations..

Uncertain markets were hoping the ECB’s press conference after the rate decision would give them a clue as to whether the rise would be a one-off or the beginning of a tightening cycle, in spite of cooling eurozone growth.

“Markets are well ahead of the ECB, pricing almost 80bp worth of rate hikes over the coming year,” said analysts at Danske Bank. “Should [ECB president Jean-Claude] Trichet make very conclusive comments -- whether it is ‘no more hikes’ or ‘more hikes to come’ -- they would have a considerable market impact.”

Hopes grew that the Bank of England might be more accommodative after figures showed the U.K. construction sector declined at its fastest rate since 1997. The data was the latest in a string of negative numbers on the U.K. economy, which combined with a profit warning from key blue-chip Marks and Spencer to send sterling tumbling.

Currency analysts at BNY Mellon said investors were turning against the U.K. Over the past five days the U.K. has experienced its second, fourth, and fifth largest equity outflows in the past 18 months, they said, which “only adds to our conviction that sterling has been living on borrowed time.”

Late in New York, the pound was 0.2 per cent lower against the dollar, while the euro had gained 0.5 per cent against the dollar.

Elsewhere in currency markets the Australian dollar jumped 1 per cent against its U.S. counterpart after better-than-expected retail sales. The South Korean won matched that rise, up 1 per cent on reports the country’s central bank had sold $3bn in an attempt to support the currency.

In commodity markets, it was not just the oil price that was moving equity markets. Coal prices dropped sharply in what onlookers said was an overdue market correction, having reached record levels earlier in the week. The falling prices knocked shares in resource companies, including Antofagasta and Rio Tinto.

Copper climbed 2 per cent to $8,780 a ton, its highest level in more than two months, as miners continued to strike in Peru.

Government bond yields fell in the U.K. and U.S. amid deepening gloom about the two economies. Yields rose in the eurozone on expectations of higher interest rates.