World stocks fell and oil surged above $103 a barrel on Thursday as violence in Egypt escalated, adding to concerns about inflationary pressures which could threaten the global economic recovery.
Supporters of President Hosni Mubarak opened fire on protesters in Cairo's Tahrir Square on Thursday, killing at least five, in a fresh spike in violence over an unprecedented challenge to his 30-year-old rule.
Global food prices measured by the U.N. Food and Agriculture Organisation hit their highest level since records began in 1990. Rising food prices have sparked unrest in Egypt and Tunisia are threatening to spill over to other countries.
This is also encouraging investors to cut back on risky assets especially after world stocks hit 29-month high on Wednesday.
Investors are also eyeing on the European Central Bank President Jean-Claude Trichet's news conference later in the day for clues on how the bank would combat inflation.
Investors will be focused on the ECB meeting and want a clear cut statement on how it plans to combat inflation, Heino Ruland, strategist at Ruland Research in Frankfurt said.
We have seen a lot of companies complain about rising input costs and how these are now going to be passed onto the customer. This is not good news and inflation needs to be tackled.
MSCI world equity index <.MIWD00000PUS> fell around 0.15 percent but many Asian players away for the Lunar New Year holidays. The Thomson Reuters global stock index <.TRXFLDGLPU> was down around the same amount.
The FTSEurofirst 300 index <.FTEU3> fell 0.5 percent while emerging stocks <.MSCIEF> added 0.15 percent.
U.S. crude oil rose 0.7 percent to $91.49 a barrel while ICE Brent crude for March rose to as high as $103.37 a barrel, its highest since September 26, 2008.
The chance of contagion to a country that is systemically important for oil markets still remains relatively low, but it's the combination of that possibility and the importance of oil flows from the Red Sea to the Mediterranean through the Suez Canal that is building a premium (into prices), said Ben Westmore, commodities economist at National Australia Bank.
Fears have grown that unrest in Egypt and Tunisia would spread to other countries in the Middle East and threaten the region's oil exports.
And higher energy, food and other commodity prices are fanning concerns that the resulting inflationary impact -- not just in fast-growing emerging markets but also in developed economies -- would squeeze corporate profits and hit the global economic recovery.
Euro zone inflation was already at 2.4 percent in January, moving further above the ECB's target.
JP Morgan expects a sustained 10 percent rise in oil prices would cut global gross domestic product by 0.25 percentage points.
The bund futures were steady ahead of Spanish debt auctions that are expected to go smoothly. Investors are increasingly confident that policymakers will agree a solution to resolve the euro zone's debt crisis.
The dollar <.DXY> rose 0.1 percent against a basket of major currencies while the euro ticked lower to $1.3786, having hit a 12-week high of $1.3862 on Wednesday.
(Editing by Toby Chopra)