Middle East Violence Sends Us Stocks Lower

Wall Street woke up yesterday to the potential repercussions of escalating violence in the Middle East, with stock markets suffering a sharp sell-off as the price of crude oil shot higher.

By early afternoon, the Dow Jones index was trading 135 points - or 1.3% - lower at 10,268, with the Nasdaq index down 36 points at 1822.

By contrast, the price of crude gained more than a dollar to $27.40 in New York. In London, the International Petroleum Exchange was closed, along with other financial markets.

While trading after the holiday weekend was light, traders said they detected a new wariness among investors after recent strength in the equity market - achieved despite the worsening violence on the West bank and the growing threat of a military strike on Iraq.

On the first day of the second investment quarter, share prices extended their losses after a report by the Institute for Supply Management showed manufacturers' prices rising more than expected during March.

Despite evidence in the report that the US manufacturing sector is pulling out of recession, the news simply encouraged speculation that a build up of inflationary pressures may prompt America's Federal Reserve to raise interest rates again within the next two-to-three months.

Similarly, a positive report on the construction industry was also ignored.

"Anything that would hasten the Fed to tighten is bad for stocks," noted Benjamin Pace, a fund manager at Deutsche Bank.

"War and uncertainty are not good for any markets," one analyst said, adding that with oil prices now at a level not seen since September, the knock-on cost to business was bound to impinge on corporate earnings.

The bearish mood was compounded by Merrill Lynch, the investment bank, which issued a series of investment downgrades on the retailing sector.

Wal-Mart, the discount retailer which owns Asda in Britain, suffered its biggest fall for six months, the share price losing 4% at one stage. Ironically, Wal-Mart has just been named America's leading company in the Fortune 500 listings, which are ranked by annual sales revenues. The company replaces oil group Exxon Mobil at the top of the annual magazine list.

There was similar nervousness in the motor sector, where manufacturers have had to maintain extremely cheap financing deals in an effort to bolster demand among consumers. Shares in Ford fell almost 5% during the day.

Xerox Corporation will restate its financial results for the past five years as part of an agreement with the securities and exchange commission, the photocopying company said last night.

It may also pay a $10m civil penalty as part of the settlement with America's main financial regulator.