European stocks mostly fell on Friday as oil prices shot to record levels, but losses were less than falls on other global markets hit by soaring crude costs and a weak US economy.
Concerns are growing among investors that rising energy costs will fuel inflation and lead to higher interest rates worldwide, putting the brakes on global economic growth.
"Inflation risk has rapidly replaced credit risk as the predominant issue facing global financial markets," said Barclays Capital analyst Larry Kantor.
"The effects of higher inflation are poised to work through the global economy in profound ways for the remainder of the year."
Oil prices rose to record high levels close to 142 dollars a barrel on Friday.
In European stock market trade, the Paris CAC 40 index was down by 0.84 percent at 4,389.10 points approaching the half-way mark.
Frankfurt's DAX 30 shed 0.75 percent to 6,410.97 points, but in London the FTSE 100 was up by 0.19 percent at 5,528.90 points.
Traders said the FTSE was in positive territory owing to large gains being won by heavyweight energy companies on the back of surging crude prices.
While higher crude costs hurt most companies, they benefit oil companies as their profits jump.
Earlier in Asian trading, Tokyo closed down by 2.0 percent, extending a losing streak to a seventh day, while Shanghai slumped 5.3 percent.
Seoul closed 1.9 percent lower, Hong Kong shed 1.84 percent and Sydney lost 1.4 percent.
"The fall in the US stock market (overnight) caused by surging crude oil prices and anxiety over outlook for the financial sector" sparked the selloff in Asia, said Tsuyoshi Segawa, equity strategist at Shinko Securities.
A weak dollar was also weighing on Japanese exporters, he said.
Asian investors took their cue from Wall Street where the Dow Jones dropped more than three percent on Thursday to its lowest finish since September 2006.
Oil prices had topped 140 dollars for the first time on Thursday after the president of the OPEC producer cartel, Algerian Energy Minister Chakib Khelil, forecast that prices could soon surge as high as 170 dollars a barrel.
"Market confidence has been hurt badly. So, further (stock market) weakness is possible over the next few trading sessions," said Mega Securities analyst Alex Huang.
Meanwhile in China, concerns over new share offers also weighed on shares there as investors worried that liquidity pressure would further impact the already weak stock market.
The securities regulator said late Thursday that it would assess an application for initial public offerings in Shanghai by Everbright Securities and China South Locomotive and Rolling Stock Corp on Monday.
The dollar fell against the euro on Friday, despite a downbeat survey on economic confidence in the eurozone, ahead of next week's expected interest rate rise from the European Central Bank.
Japan's core inflation excluding volatile fresh food prices rose 1.5 percent in May from a year earlier, the quickest pace since a consumption tax hike in March 1998, the government said Friday.
Household spending in May, meanwhile, sank 3.2 percent from the previous year, according to the Ministry of Internal Affairs and Communications. That was worse than a market forecast for a 2 percent decline and marked the deepest slump since September 2006.
"Rising oil and commodity prices are pushing up costs, which is damaging corporate profits and consumer sentiment," said Economy Minister Hiroko Ota, according to Kyodo news agency. "We need to continue to monitor the situation."
Other numbers were a bit more upbeat: industrial production in May rose 2.9 percent from the previous month as manufacturers boosted output of mobile phones and cars, and the jobless rate remained flat at 4 percent.
Retail sales inched up 0.2 percent from a year earlier on higher fuel and food prices, the government said in a separate report.
Until last year, Japan had struggled with deflation, or falling prices. But Friday's data indicates that global factors are exerting upward pressure on basic living expenses such as fuel and non-fresh foods.
White bread prices were up 12.0 percent from a year earlier. Spaghetti leapt 32.2 percent, and instant noodles jumped 20.7 percent. Gasoline cost 18.0 percent more, and kerosene prices rose 27.6 percent.
On top of record crude oil prices — which rose above $141 a barrel for the first time Friday — Japanese drivers paid more at the pump after the government reinstated a gas tax that had been temporarily suspended in April.
The CPI data further highlights the policy dilemma facing Bank of Japan: rising inflation coupled with a slowing economy.
Economists are forecasting virtually zero growth or even a contraction in the world's second largest economy in the April-June quarter and over the months ahead.
As such, the central bank is likely to keep its key interest rate on hold at 0.5 percent for the time being even in the face of inflationary pressures, said UBS economist Akira Maekawa in a research report Friday.
Japan's benchmark Nikkei 225 stock index plunged 2 percent to to a two-month low of 13,544.36, dragged down by an overnight tumble on Wall Street, skyrocketing global oil prices and the government's lower assessment of industrial production.
Takehiro Sato, chief economist at Morgan Stanley in Tokyo, predicts that inflation in Japan is headed even higher. Core CPI could hit 2 percent later this year, he said, and might even reach 2.5 percent by April 2009.
Inflation driven by increases in frequently-purchased items is cause for concern, Sato said, countering some analysts' views that inflation in Japan can spur a broader recovery in domestic demand.
"Possibly, (foreign observers) are misunderstanding the situation in Japan," he said.
Energy prices contributed significantly to inflation. Stripping out food and energy, CPI was down 0.1 percent, a sign that Japan's underlying inflation is stable.
"It's all a story of imported inflation effects rather than domestic momentum," said Richard Jerram, an economist for Macquarie in Tokyo.
He pointed to the rise in industrial production as evidence that the economy is hitting turbulence but isn't undergoing a serious downturn.
However, the government downgraded its assessment of manufacturing activity, calling it "flat" with a "few weakening factors." It projects production to fall 0.9 percent in June and increase 2.2 percent in July.
"You would've thought that if there was a serious deterioration in demand conditions, you'd be seeing inventories pushing quite a lot higher and that's not happening," Jerram said. "So I think it suggests that yes, exports are hitting a difficult period, and that's going to have an impact on industrial production. It's going to be a struggle for the next six months, but it's not a particularly frightening development."
American International Group Inc
(AIG.N) said it planned to absorb up to $5 billion on losses of
sales of investments from a dozen insurance units hit by the
subprime meltdown, Bloomberg News reported on Friday.
In an interview, Christopher Swift, vice president for life
and retirement services, also told Bloomberg that AIG would
inject an undisclosed amount of capital into some of the
The world's largest insurer had previously said it would
take $500 million of losses on investment sales after the
units' securities-lending accounts took $13 billion of
write-downs tied to the subprime-mortgage collapse during the
past year, Bloomberg reported.
Such losses were factors cited by ratings agency Moody's
when it downgraded AIG's credit ratings and kept its outlook
(Reporting by Christopher Kaufman; Editing by Lisa Von Ahn)