Oil holds below USD 109 per barrel

Financial spreadbetters expected Britain8217;s FTSE 100, France8217;s CAC-40 and Germany8217;s DAX to open down more than 1 per cent.

Oil prices came under pressure on worries about economic growth and as concerns about how Hurricane Gustav could impact Gulf of Mexico oil production receded.

The prospect of cheaper fuel and lower inflation gave a boost to a few stocks, such as Japanese exporter Honda Motor Co, which gained 5.1 per cent, helping the Nikkei average to close up 0.6 per cent.

But most shares suffered as the bigger picture began to bite.

8220;Sentiment towards falling oil prices has changed quite fast8230; Investors are quite afraid of what this means in terms of a global slowdown,8221; said Y.K. Chan, strategist with Philip Capital Management in Hong Kong.

The Hong Kong market gained some support from Huiyuan Juice, whose shares shot up after Coca-Cola offered to buy the company for a total of 2.5 billion, or HK12.2 a share 8211; three times its last market price and equal to the stock8217;s all-time high. The shares soared more than 160 per cent.

In Australia, the world8217;s top miner BHP Billiton slipped about 3.4 per cent, while its takeover target Rio Tinto fell a steep 6.2 per cent after the European Commission added uncertainty to BHP8217;s hostile offer, suspending the clock on its competition probe.

OSPRAIE DIVES

Dealers expected more volatility in commodity prices after a big US hedge fund, Ospraie Asset Management, announced it was shutting its flagship commodities product after steep losses.

Ospraie is 20 per cent-owned by Lehman Brothers, itself in focus after Korea Development Bank said it was talking to the US bank about taking a stake.

Lehman shares fell more than 3 per cent in Tuesday after-hours trading.

Ospraie8217;s troubles and tumbling oil prices led investors to liquidate bets on higher-yielding commodities and currencies.

The euro hit a seven-month low against the dollar and sterling slumped to a 2-frac12; year low as market players cut positions before policy decisions by the European Central Bank and the Bank of England on Thursday.

The Australian and New Zealand dollars fell more than 1 per cent to a one-year low against the dollar. Selling of the Aussie picked up after data showing Australian economic growth slowed slightly more than expected in the second quarter.

The sharp slide in the euro and Aussie has also forced players to cut back on carry trades in which the low-yielding yen was used to fund positions in higher-yielding currencies.

8220;Investors are unwinding positions in the yen crosses on the growing view that these currencies have now entered a medium- to long-term downtrend,8221; said Hiroshi Yoshida, a trader at Shinkin Central Bank.

The dollar index, which tracks its performance against six major currencies, was up 0.4 per cent at 78.381 after touching an 11-month high of 78.546.

US crude oil was 80 cents lower at 108.91 a barrel in Asian trade, having lost more than 6 since Friday, dipping below its 200-day moving average of around 111 on Tuesday for the first time since May 2007.

8220;It8217;s the economy, economy, economy. Everyone8217;s worried about demand destruction,8221; said Robert Nunan, a risk management executive at Tokyo-based Mitsubishi Corp.

8220;The market is bearish short- to medium-term, although it has been supported by other factors such as the hurricane and the situation in Russia and Georgia,8221; he said.

Japanese government bonds pushed higher, with the market still enjoying the after-glow of a 10-year debt auction that highlighted solid investor demand at current yields.

8220;In the yen bond market, it looks like economic deceleration factors will continue to lend support for some time,8221; said JGB strategists at Barclays Capital in a note to clients.

Analysts also said the market was taking in its stride this week8217;s surprise resignation of Yasuo Fukuda as prime minister. Former foreign minister Taro Aso has emerged as the frontrunner to succeed Fukuda.

Benchmark 10-year yields fell 3.5 basis points to 1.455 per cent, holding near a four-month low of 1.400 per cent.