Libya chaos spooks markets

Fears that Libya is heading toward civil war weighed on stocks Monday and pushed oil prices sharply higher.

With reports suggesting that over 200 people have been killed in clashes across the country that have spread to the capital of Tripoli, investors are getting increasingly worried about the escalating violence in one of Africa's biggest oil producers.

Those concerns were heightened by a statement from Seif al-Islam Gadhafi, the son of Libya's longtime leader Moammar Gadhafi. Blaming everyone from drug addicts to the media for the current turmoil afflicting Libya, he warned that civil war was a real possibility and that his father would fight until "the last bullet."

The oil markets have been the main point of interest, especially as Libya accounts for a chunk of the world's oil supplies at a little under two per cent of global output.

With BP saying it is "very likely" to evacuate employees in the coming days and investors wondering which oil producing country may be next to face the wrath of its people, oil prices have spiked sharply higher. Benchmark crude for March delivery was up $2.17 at $88.37 a barrel in electronic trading on the New York Mercantile Exchange.

In recent weeks, the West Texas Intermediate North American benchmark has become disconnected from the European and world standard, Brent crude. Brent crude was more than $2 higher on Monday and closing in on $105 a barrel.

Investors' appetite for risk in equity markets, meanwhile, fell sharply.

'Political risks are hanging over a big proportion of the world's oil supplies.' —Simon Derrick, BNY Mellon analyst

When risk appetite is low, investors usually look for shelter in the perceived safe havens of the U.S. dollar and gold at the expense of more risky investments such as stocks. The April gold bullion contract was $13.50 higher to $1,401.70 an ounce in New York on Monday.

"Political risks are hanging over a big proportion of the world's oil supplies," said Simon Derrick, an analyst at Bank of New York Mellon. "I can see safe haven buying the natural outcome of all this."

By midmorning London time, Germany's DAX index was 0.7 per cent lower at 7,376 while the CAC-40 in Paris fell 0.6 per cent to 4,131. The FTSE 100 index of leading British shares was down 0.2 per cent at 6,069.

Markets in the U.S. are closed Monday for the President's Day holiday. The Toronto Stock Exchange was also closed for a provincial holiday.

In the currency markets, the euro fell 0.2 per cent to $1.3660, while the U.S. dollar was unchanged  against its european equivalent at 83.16 yen. The Canadian dollar traded at 101.66 cents US on Monday, up 0.24 of a cent from Friday's close.

Gold spikes

Among commodities, an ounce of gold spiked over $10 to $1,399.

The unrest in Libya dominated European markets and deflected attention from positive economic data and a heavy defeat for German Chancellor Angela Merkel's party at a state election.

Particularly strong was a survey showing that business confidence in Germany, Europe's biggest economy, has risen once again to hit a new two-decade high. The Ifo institute said its confidence index — a closely watched indicator — was up to 111.2 points for February from 110.3 in January. It was the ninth consecutive month-on-month rise.

Despite a buoyant German economy, Merkel's Christian Democrats lost badly in Hamburg.

Lee Hardman, a currency economist at the Bank of Tokyo Mitsubishi-UFJ said the defeat could prove to be a significant development should it set a precedent going forward. The next two upcoming state elections are on March 27, two days before a crucial summit of EU leaders.

"Should the CDU party continue to lose national support ahead it could damage its ability to deal effectively with the eurozone debt crisis," Hardman said.

Earlier in Asia, investors also had their first chance to respond to Friday's decision by the monetary authorities in China to increase the amount banks hold in reserve. The 0.5 per cent increase was announced after Asian markets had closed.

Mainland Chinese shares shrugged off the central bank's move. The benchmark Shanghai Composite Index gained 1.1 per cent to 2,932.25.

The Shenzhen Composite Index gained 1.9 per cent to 1,297.66.

Elsewhere, Japan's Nikkei 225 stock average rose 0.1 per cent to 10,857.53 with the index enjoying a six-day winning streak to close at a 10-month high.

Hong Kong's Hang Seng index lost 0.4 per cent to 23,508.62, while South Korea's Kospi fell 0.4 per cent to 2,005.30 and Australia's S&P/ASX 200 shed 0.7 per cent to 4,900.