Escalating conflict shakes globe

By VERNON SMALL deputy political editor

The flare-up in the Middle East and a surge in oil prices burned financial markets around the globe yesterday, helping to send New Zealand shares to a two-year low and threatening a renewed surge in inflation.

The NZSE-40 Index dropped 2 per cent to 1877.40 but brokers said local sentiment held up well in the face of the worldwide gloom.

Most of the fall was due to weakness in two blue-chip stocks. Telecom continued its slide, down 19c to $5.21, while Fletcher Energy shares were crunched after the Commerce Commission refused Shell and Apache's $4.6 billion offer to buy the company.

But rising world oil prices, fuelled by fears of Arab retaliation against Israel and its US backers, could see recent petrol price falls reversed.

That would worsen the Reserve Bank's headache over how to curb inflation without harming growth.

Higher oil prices were credited with offsetting some of the selling pressure on Fletcher Energy.

Fletcher Energy shares dived $1.22 to $8.14, well off their lows in Australia overnight, on expectation of a revised bid for the company.

Fearing investors would interpret the commission's decision as hostility to foreign investment, Finance Minister Michael Cullen reiterated that the commission was independent of Government influence.

The Fletcher Energy ruling also undercut the dollar, which set an all-time low of 39.59USc yesterday, before ending local trading at 39.86USc.

The dollar had been buoyed by the Shell bid because the cash component was to be paid in US dollars.

It was expected local investors would then trade those for kiwi, boosting demand and therefore the value of the local currency.

Earlier, US stocks fell in the grip of the worsening crisis in Israel, the attack on a US warship in Aden and fears of falling profits among retail and high-tech companies.

The Dow Jones Industrial Average slipped 3.6 per cent to 10,034.58, its biggest loss since April and fifth-largest points drop in its history. The high-tech dominated Nasdaq fell for a sixth straight day, losing 3 per cent.

Japan's Nikkei 225 stock average shed 2.4 per cent, while Korea's main index, the Kospi, plunged 5.3 per cent on weaker prices for computer chips.

Not surprisingly, oil stocks escaped the selling pressure as fears spread that higher prices and forecasts of a cold winter would fuel inflation at a time when heating oil stocks are low in the US.

Crude oil prices had earlier jumped 8.5 per cent to $US37 ($89) a barrel, the biggest one-day gain in two years, on concern about the violence in the Middle East.

Dealers were concerned Arab oil producers would retaliate against Israel and its US backers by cutting oil flows, as they did in 1973 in response to the Arab-Israeli War.

But an Iranian official and US oil industry analysts dismissed an embargo as unlikely.

Herald Online feature: Middle East

Map

Middle East Daily

Arabic News

Arabic Media Internet Network
Jerusalem Post

Israel Wire

US Department of State - Middle East Peace Process