Fears over the slowing global economy hit financial markets on Wednesday, knocking oil below $108 a barrel, pushing world stocks lower and lifting the dollar to 11-month peaks.
U.S. crude oil prices fell 1.5% to $107.99 a barrel, nearly $40 below their July record peak, as weakening Hurricane Gustav shifted investors' focus back to the softening in energy demand caused by the slowing global economy.
World stocks fell towards last month's two-year trough, while emerging market stocks hit a 17-month low as lower commodity prices weighed on resource stocks. Safe-haven government bonds gained as inflation worries eased.
"We're seeing a continuation of the trend where sentiment on the rest of the world is deteriorating while sentiment in the U.S. is improving albeit from a very low base, and the dollar is outperforming as a result," RBC head of FX strategy Adam Cole said. The dollar was up half 0.6% against a basket of major currencies after hitting an 11-month peak while the euro fell to an eight-month low of $1.4386.
The FTSEurofirst 300 index fell 1.4% while the MSCI main world equity index fell 0.7%, adding to a loss of 2.4% in August.
Reflecting the broad decline in commodities, the Reuters-Jefferies benchmark index of commodity futures fell on Tuesday to its lowest since February 2008.
On Tuesday, hedge fund Ospraie Management — in which Lehman Brothers took a 20% stake in 2005 — said it will close its flagship fund after it plunged 27% in August on losses in energy, mining and natural resources equity holdings.
That would be one of the biggest ever closures of a commodities-focused hedge fund.
Lehman shares, traded in Frankfurt, were down 3%. U.S. stock futures were pointing to a weaker open on Wall Street later.
"The last thing Lehman needs while they are looking to raise new capital is to have skeletons like this falling out of the closet. There's a clear possibility that this could impede the process of getting new investors in," said Arthur Hogan, chief market analyst at Jefferies & Co in Boston.
EUROPEAN, EMERGING MISERY
Adding to the evidence of a slowing economy, data confirmed that the euro zone's economy shrank in the second quarter, moving half way into recession — technically defined as two consecutive quarters of negative growth.
Separate data also confirmed that the euro zone's service sector shrank in August.
Sterling extended its relentless decline with the trade-weighted index hitting a 12-year low for an eight straight session and slumping to a 2-1/2 year low of $1.7669.
The British currency has been under pressure as a series of weak data reinforced expectations that the economy is on the brink of recession, fanning expectations of an interest rate cut by the year end.
Emerging sovereign spreads widened 5 basis points to trade 312 bps over U.S. Treasuries, their widest in three years.
Emerging stocks fell 1.2% to their lowest level since March 2007.
The September Bund future rose 36 ticks as investors bought into safe-haven government bonds.
Gold slipped below $800 an ounce, tracking oil lower to hit a session low of $798.90.
