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Markets roiled by oil price spike, Portugal woes

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PAN PYLAS | July 3, 2013 12:00 PM EST | AP

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LONDON — Financial markets were roiled Wednesday as Egypt's unfolding political crisis pushed the price of oil to its highest level in more than a year and Portugal's government teetered on the edge of collapse.

While the benchmark New York oil price rose above $100 a barrel for the first time since May 2012, stocks in Europe and Asia piled up the losses, particularly in Portugal, where the main PSI stock index was trading 5.4 percent lower after two leading Cabinet members quit the government.

The interest yield on the country's benchmark 10-year bond also spiked over a percentage point higher to 7.70 percent at one point before dropping back to 7.32 percent. Despite coming off highs, it's a clear signal that investors are fretting about the future of the bailed-out country and its efforts to get a handle on its debts.

There are fears that other Cabinet members will quit over the government's austerity program and that may signal early elections and ensuing uncertainty.

"It's all about Portugal midweek where political pressures are breaking investor spirit around the world," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co.

Among the key indexes in Europe, the FTSE 100 index of leading British shares closed down 1.2 percent at 6,229.87 while Germany's DAX fell 1 percent to 7,829.32. The CAC-40 in France ended 1.1 percent lower at 3,702.01.

Investors, particularly in Europe, are clearly worried that Europe's debt crisis, which has been dormant of late, may be about to erupt again. Over recent months, it has barely been a driver in markets as the focus of attention turned toward monetary policy developments in the U.S. and Japan.

In the U.S., trading was a lot calmer than in Europe – the Dow Jones industrial average was up 0.3 percent at 14,969, while the broader S&P 500 index fell 0.1 percent to 1,612. Wall Street will close at 1 p.m. on Wednesday ahead of the Independence Day holiday on Thursday and will re-open Friday.

Helping to shore up sentiment in the U.S. is an easing over concerns of an imminent change in the U.S. Federal Reserve's monetary policy. The ADP survey showing private payrolls was up 188,000 in May was solid but not major, while the 5,000 fall in weekly jobless claims was fairly insignificant.

However, a fall in the main non-manufacturing index of the Institute for Supply Management to a three-year low of 52.2 in June reined in expectations that the Fed will start reining in its monetary stimulus soon.

"These figures may well indicate that growth seen in the U.S. is faltering," said Brenda Kelly," senior market strategist at IG.

An easing in expectations of an imminent Fed policy change was evident in the performance of the dollar. The euro was up 0.2 percent at $1.3005.

When Wall Street traders return to their desk, the main point of interest will likely be the government's official nonfarm payrolls report for June and that could potentially alter the mood.

Investors around the world were also keeping a close watch on the oil price as Egypt's president, Mohammed Morsi, defied calls to resign despite the demands of millions of protesters and a threat by military to suspend the constitution, disband parliament and install a new leadership.

Egypt is not an oil producer but its control of the Suez canal – one of the world's busiest shipping lanes, which links the Mediterranean with the Red Sea – gives it a crucial role in maintaining global energy supplies.

As a result, the benchmark New York rate has edged up this week and was trading a further $2.26 at $101.86 a barrel.

"The primary reason behind the rally is undoubtedly concerns that the ongoing political turmoil in Egypt may disrupt oil supplies through the Suez Canal," said Fawad Razaqzada, technical analyst at GFT Markets.

Earlier, Asian markets also closed lower with Japan's Nikkei 225 down 0.3 percent to 14,055.56 while Hong Kong's Hang Seng shed 2.5 percent to 20,147.31 and Seoul's Kospi fell 1.6 percent to 1824.66. In China, the Shanghai Composite lost 0.6 percent to 1,994.27 following disappointing manufacturing data.

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Kay Johnson in Bangkok contributed to this report.