Oil, stocks slip as China sparks recovery fears

Commodity prices and equity markets around the world slid yesterday after China said it would raise banks' reserve requirements in a move that could dampen a nascent recovery from the worst global recession in decades.

A disappointing start to the corporate earnings season in the United States and a profit warning from Chevron Corp also hurt investor sentiment.

European equities retreated from a 15-month high to close lower while US stocks fell, after a six-day winning streak, after Alcoa Inc., the first major US company to release earnings, reported worse-than-expected results.

The People's Bank of China surprised markets with a statement that next week it would raise the reserve requirement ratio on banks in a move may dent Chinese demand and slow global economic recovery.

"The move is designed to control the excessive growth and therefore seen as likely to impact demand and hamper recovery," said Jimmy Yates, head of equities at CMC Markets.

The sudden central bank move came earlier than investors had expected and appeared prompted by concerns that a renewed surge in bank lending was flooding the Chinese economy with too much cash, risking overheating and a surge in inflation.

Concerns that banks and other financial services firms could face fees from the US government in a bid to recoup losses tied to industry bailouts sent the Nasdaq and S&P 500 down by more than one per cent.

A senior US official confirmed President Barack Obama is considering a levy as part of the fiscal 2011 budget he will unveil in February. Media reports said the fee could raise as much as $120 billion.

"It's kind of changing the rules in the middle of the game and that's causing investors to lock in some gains," said Alan Lancz, president of Alan B. Lancz & Associates Inc in Toledo, Ohio.

Shortly after midday, the Dow Jones industrial average was down 72.63 points, or 0.68 per cent, at 10,591.36. The Standard & Poor's 500 Index was down 13.23 points, or 1.15 per cent, at 1,133.75. The Nasdaq Composite Index was down 34.35 points, or 1.49 per cent, at 2,278.06.

In Europe the FTSEurofirst 300 index closed 0.9 per cent lower at 1,053.93 points after rising to its highest in more than 15 months in the previous session.

Commodity shares were among the top decliners, with BHP Billiton, Antofagasta, Rio Tinto, Xstrata and ENRC down 1.8 to 3.3 per cent, on concerns that Chinese monetary tightening could take some of the fizz out of the global economic recovery.

Commodity-linked currencies, including the Australian, New Zealand and Canadian dollars, hit session lows against the US dollar, following a sell-off in gold prices. They also tumbled against the yen.

The dollar was down against a basket of major currencies, with the US Dollar Index down 0.12 per cent at 76.914.

The euro was down 0.01 per cent at $1.4511. Against the yen, the dollar was down 1.30 per cent at 90.88.

Industrial metals fell, with copper dropping to a one-week low, while zinc and nickel dropped to their lowest in about three weeks. Lead fell to its lowest since December 31.