Oil surges on Yemen air strikes, stocks tumble

By Marc Jones and Nigel Stephenson

LONDON (Reuters) – Escalating tensions in the Middle East as Saudi Arabia and its allies launched air strikes on Yemen pushed oil prices up as much as 6 percent on Thursday, and sent world share markets tumbling.

In the currency markets, the dollar fell against traditional safe-havens the Swiss franc (CHF=) and the yen (JPY=) after warplanes from Saudi Arabia and other Arab countries struck Shi’ite Muslim rebels fighting to oust Yemen’s president, and bombed the airport at the capital Sanaa, in a move seen as a bid to check Iranian influence in the region.

Iran denounced the attacks as the Saudi military also targeted the Iran-backed Houthi rebels besieging the southern Yemen city of Aden.

Arab producers ship oil via the narrow Gulf of Aden before heading to the Suez Canal and to Europe, and the price of Brent crude spiked more than $ 3 a barrel to close to $ 60, a 2 1/2-week high before steadying at $ 59 (LCOc1).

U.S. crude saw a similar jump as it topped $ 51 a barrel.

Wall Street was expected to see the S&P 500 (.SPX) and the Dow Jones Industrial (.DJI) start 0.7 percent in the red, adding to three days of falls that saw both indexes drop below their 2015 starting levels on Wednesday. [.N]

“The air strikes in Yemen have really created a risk-off mood,” said Rabobank strategist Philip Marey. “We have had a lot of upbeat data (recently), so maybe this was bound to happen with the first major negative surprise we had.”

A vertiginous slide in oil prices, from more than $ 115 a barrel last June to a low of $ 45 in January, has been a major driver of financial markets in the past year and a key factor driving global interest rates down and stock markets up.

European shares followed Asian stocks lower and were showing no sign of a rebound as the start of U.S. trading neared.

The pan-European FTSEurofirst 300 index (.FTEU3) was down 1.5 percent. In Germany, a major industrial economy heavily dependent on oil imports, the DAX index (.GDAXI) fell as much as 1.8 percent, while shares in Athens (.ATG) took a 3.5 percent dive after three days of gains as Greek worries returned.

Middle East stocks were mixed as investors weighed the negative implications of the tensions against the benefit of a rise in oil prices. Dubai’s DFM index (.DFMGI) dropped more than 3 percent but bounced back to be off a modest 0.8 percent while Saudi shares (.TASI) made gains of 0.4 percent.

SHUFFLE TO SAFETY

As the dollar fell, ECB data showing signs that bank lending in the euro zone is now gradually improving helped the euro to consolidate its recent gains (EUR=). It hovered just below $ 1.10.

The dollar has been on the rise for months on the prospect of a first U.S. interest rate rise since 2006 but its ascent has lost steam since the Federal Reserve last week made clear it was in no hurry to tighten policy and after weak data.

“We have been talking about it being the beginning of the end and that’s still the way I would characterise it,” said Daragh Maher, currency strategist at HSBC in London.

“What it will have done, I think, is raised some doubts in people’s minds that the bull run is not without end.”

Oil’s rise was a fillip for the Russian rouble, which gained 1.4 percent to 62.14 to the dollar (EURRUBTN=MCX). Russia is a major producer and the oil price is a key factor in government finances.

Gold also rose, climbing roughly 1 percent to $ 1,205 an ounce (XAU=), supported by the weak dollar and Middle East tensions.

Yields on German government bonds, the benchmark for euro zone borrowing costs, nudged lower, though the prospect of more expensive oil sparking inflation limited falls. Ten-year Bunds yielded 0.225 percent, down fractionally on the day, while equivalent U.S. yields inched higher.

“The impact of Saudi Arabia’s air strikes in Yemen is complex,” said Mizuho strategist Peter Chatwell.

“It’s geopolitical risk, so Bund bullish, but the rise in the oil price should push expectations of headline inflation higher over the coming months.”

(Additional reporting by Shinichi Saoshiro in Tokyo, Henning Gloystein in Singapore, Alistair Smout, John Geddie and Patrick Graham in London; Editing by John Stonestreet and Susan Fenton)