Philippine shares close sharply lower on inflation, U.S. concerns - UPDATE

Philippine shares fell sharply on Tuesday as investors, returning from a three-day break, played catch-up to losses on Wall Street Friday on concerns about surging oil prices and the continuing fallout from the credit crisis.

The key composite index fell more than 3 percent to close at its lowest level in more than one and a half years.

'The market was taken aback by Wall Street's sharp fall and oil prices jumping to new record peaks near $140 a barrel last Friday,' said Jonathan Ravelas, chief strategist at Banco de Oro
Unibank.

'Everyone's quite emotional.'

The 30-company composite index lost 93.75 points or 3.4 percent at 2,645.95, its lowest finish
since Oct. 23, 2006 when it settled at 2,625.52.
Philippine financial markets were closed on Monday for a public holiday.
The all-share index fell 44.13 points or 2.6 percent to 1,667.04.
Decliners overwhelmed advancers 95 to eight, while 42 ended flat.
Turnover reached 4.3 billion pesos, more than double Friday's 2.1 billion pesos.

'The uncertainty is spooking investors, only brave souls will go against the selling tide. Investors are uncomfortable with prospects of higher inflation and interest rates,' said Astro del Castillo, managing director at First Grade Holdings.

After slipping by more than $4 a barrel on Monday from Friday's record peak of close to $140, New York's main oil futures contract, light sweet crude for July delivery gained 63 cents to $134 in Asian trading on Tuesday.

Oil prices rose despite a call by the world's leading producer, Saudi Arabia, for talks with consumer nations on soaring prices. OPEC Secretary General Abdalla El-Badri said on Monday that speculation and a weak U.S. dollar, rather than any supply shortage, were driving prices.

Rising oil prices is stoking fears about inflation in the Philippines, which rely heavily on imported crude. Inflation in the Southeast Asian nation soared to a nine-year high of 9.6 percent in May, prompting the central bank to raise key interest rates by a quarter percentage point on Thursday. That was the first rate hike since October 2005.

Last Friday's spike in energy prices came as the U.S. Labor Department reported the unemployment rate jumped to 5.5 percent from 5.0 percent in April, marking the biggest monthly increase since February 1986 and rekindling worries about the world's biggest economy slipping
into recession.

Data released before the opening bell showed Philippine exports rose a modest 4.9 percent in April from a year earlier, rebounding from a 6.6 percent drop in March. But the government report failed to calm nerves.

The United States remains a key market for Philippine exports but the latest data showed shipments to Japan, China and other Asian countries rising at double-digit rates, while U.S.-bound exports rose at single-digit level.

'The improvement is largely due to a less steep fall in electronics shipments, exports of which contracted only 1.7 percent year-on-year after a 17.2 percent drop in March,' said Frederic Neumann, economist at HSBC (nyse: HBC - news - people ).

This recovery mirrors regional trends as most Asian countries have seen their shipments strengthen in recent months, mostly on the back of strong demand from within Asia and other emerging markets, Neumann said.

Among the big caps, index leader Philippine Long Distance Telephone Co. (nyse: PHI - news - people ) fell 3.4 percent to 2,435 pesos while top conglomerate Ayala Corp. lost 5.4 percent to 305 pesos.

'Heightened inflation concerns will result in demand for higher fixed-income yields and throw off GDP growth expectations. It will also result in lower earnings forecasts that will be an added drag to the equities market,' said Francisco Liboro, president of PCCI Securities.

Megaworld Corp. slumped 9.9 percent to 1.64 pesos, hit by worries that the central bank may be forced to further raise interest rates.