Oil Hits Six-Month High, Shares Fall On Anticipated Middle East Upheaval

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Concerns that probable military strikes by Western powers against Syria could cause upheaval in the Middle East pushed oil up by over $2 a barrel on Wednesday, sent world shares lower for a second day and extended a rout in emerging markets.

* Brent crude jumps 2.4 pct to 6-month peak, gold at 3-month high

* World shares falls to 7-week low, Nikkei hits 2-month trough

* Yen holds near 2-week high against dollar

* Turkish lira, Indian rupee hit record lows

Concerns that probable military strikes by Western powers against Syria could cause upheaval in the Middle East pushed oil up by over $2 a barrel on Wednesday, sent world shares lower for a second day and extended a rout in emerging markets.

Washington and its allies appeared to be gearing up for a strike against President Bashar al-Assad's forces, blamed for last week's chemical weapons attacks, a move which could prompt retaliatory action and hit crude supply in the region.

Brent crude traded above $117 at a six-month high and the U.S. benchmark soared to its highest level in over two years.

A scramble for safety sent MSCI's world equity index to a seven week low led by a sharp selloff on Wall Street, while the safe-haven yen hit a two-week high against the dollar.

Emerging markets such as Syria's neighbour Turkey, pummelled by an expected reduction in U.S. stimulus measures, were also hit, with some flows providing support in western Europe.

"The market feels an attack on Syria is highly probable but what they're concerned about is the retaliation," said Mike Gallagher, managing director of IDEAglobal.

In the Middle East, Dubai's stock index tumbled 5.2 percent after already plunging 7.0 percent on Tuesday, leaving it at a six-week low. It is still up 49 percent this year.

"We could see a wider spillover into the region which could easily push oil prices up, at least temporarily, to $120 or $125 a barrel," Gallagher said.

The heightened Middle East tension has come as markets were already on edge about an expected reduction in stimulus by the U.S. Federal Reserve, which has seen U.S. bond yields climb and triggered a shift by investors away from emerging markets.

Syria's neighbour Turkey has proved vulnerable on both fronts seeing its currency, the lira, hit a record low of 2.07 to the dollar in early trade. The main Istanbul share index was down 1.5 percent, after tumbling 4.7 percent on Tuesday to close at its lowest level in a year.

The rout in the emerging world has extended, with the Indian rupee losing 3.7 percent to hit a new record low of 68.75 to the dollar, while some southeast Asian currencies reached multi-year lows.

Indonesia's rupiah posted a new four-year low as investors wait for a hastily-convened Bank Indonesia (BI) board meeting set for Thursday. Speculation is mounting it will opt for another rate hike to defend the currency.

The selloff brought MSCI's broadest index of Asia-Pacific shares outside Japan down 1.7 percent to its lowest level since July 9, extending the previous day's 1.2 percent drop.

In Europe, the picture was steadier after a recent run of good economic data added to the region's appeal. The single currency had inched up 0.1 percent versus the yen to about 130.03 yen and was little changed against the dollar at $1.3380 .

The flight to quality lifted German government bonds, sending the 10-year Bund yield down 3 basis points to 1.824 percent as it moves further away from Friday's 1-1/2 year highs of 1.98 percent.

However, European stocks were down for a third day as the concerns about a reduction in bond buying by the Fed, and a political crisis in Italy add tot he worries over military action fuelled profit taking on an 8 percent rally seen since late June.

The FTSEurofirst 300 index of top European shares was down 0.3 percent at 1,198.43 points in early trade after recording its largest daily drop in two months on Tuesday.

"The focus on Syria and the spike in oil prices was all that was needed to start the move (down)," said Nick Xanders, head of strategy at BTIG, who saw room for the market to fall further.

Gold shared in the safe haven buying, extending its gains into a fifth straight session and climbing over 1 percent to its highest in more than three months.

Spot gold traded around $1,425 an ounce having hit a high of $1,433.31, its highest since May 14. Silver was up 2.3 percent to $25.02 an ounce.

"We may be seeing a new trading paradigm setting in the next few days, one whereby investors sour on stocks and file back into commodities, with oil and gold likely being the two favourites in the group," INTL FCStone analyst Edward Meir wrote in a note.

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