Oil falls more than 3 percent; energy drags down stocks

By Caroline Valetkevitch

NEW YORK (Reuters) - Oil prices dropped more than 3 percent on Wednesday following a surprise increase in gasoline inventories, and declines in energy shares weighed on U.S. stocks.

The dollar recovered from recent weakness against the euro > and the safe-haven yen >, while sterling was off six-month highs hit after Britain's prime minister on Tuesday called for a snap election.

Investors also braced for the coming French election. Four days before the first round of the presidential election in France, just a few points separate the top four candidates, including two who oppose the euro - the far-right's Marine Le Pen and the far-left's Jean-Luc Melenchon, according to opinion polls.

 

In the oil market, the counter-seasonal build of 1.5 million barrels in gasoline in the latest week, along with an increase in U.S. production, pressured prices.

U.S. crude futures fell 3.8 percent to settle at $50.44, while Brent crude futures dropped 3.6 percent to $52.93.

The oil losses hurt shares of U.S. energy companies, pushing the S&P 500 energy index <.SPNY> down 1.4 percent and causing the benchmark S&P 500 <.SPX> index to reverse earlier gains.

"Crude broke $52 on WTI, that is the strongest correlation we have right now away from the case-by-case earnings we have," said Art Hogan, chief market strategist at Wunderlich Securities in New York.

U.S. first-quarter earnings so far have been mostly stronger than expected. On Wednesday, shares of Morgan Stanley rose 2 percent following the bank's results, though International Business Machines dropped 4.9 percent and pressured the Dow.

The Dow Jones Industrial Average <.DJI> was down 118.79 points, or 0.58 percent, to 20,404.49, the S&P 500 <.SPX> lost 4.02 points, or 0.17 percent, to 2,338.17 and the Nasdaq Composite <.IXIC> added 13.56 points, or 0.23 percent, to 5,863.03.

The pan-European STOXX 600 index <.STOXX>, which hit a three-week low on Tuesday, ended up 0.2 percent.

In the U.S. Treasury market, bond yields rose after a rally on Tuesday sent yields to five-month lows prompted by concerns about the French election and rising geopolitical tensions.

Benchmark 10-year notes > dropped 8/32 in price to yield 2.21 percent. The 10-year yield fell as low as 2.165 percent on Tuesday; it has tumbled from a high of 2.63 percent reached on March 14.

Questions still hung over the "reflation" trades that had lifted markets since Donald Trump became U.S. president. A run of disappointing U.S. economic data and doubts the Trump administration will progress with tax cuts have quelled expectations of faster inflation.

STERLING EASES

Sterling was down 0.19 percent at $1.2811. It hit a six-month peak against the dollar > on Tuesday following British Prime Minister Theresa May's call for an early general election on June 8, seeking to strengthen her party's majority ahead of Brexit negotiations.

Britain's FTSE 100 <.FTSE> index fell 0.5 percent.

British stocks are vulnerable to a rising pound because more than two-thirds of FTSE 100 company earnings are derived from operations overseas.

The greenback was 0.54 percent higher against the yen and up 0.17 percent against the euro.

Gold dropped 1 percent as the dollar gained, with spot gold > falling as low as $1,275.73 per ounce.

(Additional reporting by Jamie McGeever in London and Chuck Mikolajczak and Julia Simon in New York; Editing by Nick Zieminski)