Oil slide hits European stocks, safe-haven assets sought

LONDON (Reuters) - A relentless slide in crude prices put energy stocks and currencies exposed to oil exports under pressure on Friday, dampening appetite for riskier assets and underpinning flows into the safety of core government bonds.

Brent crude dropped to a 5-1/2-year low of $63 a barrel and was set for a weekly loss of more than 8 percent. Falling oil prices have sparked weakness in U.S. high yield markets and pushed up volatility across asset classes.

The STOXX Europe 600 Oil & Gas Index fell nearly 1 percent in early trade, dragging down the pan-European FTSEurofirst 300 index to 1,347.45 points. The euro zone's blue-chip Euro STOXX 50 index declined by 0.8 percent to 3,133.36 points with political concerns over Greece also hurting European stocks.

Currencies strongly linked to oil export revenues like the Canadian dollar slumped to a 5-1/2 year trough against the dollar, while the Norwegian crown hit a decade low against the greenback. And there was no end in sight for the suffering of the Russian rouble which hit another record low.

"Oil prices really are a big market driver at the moment, whether it be for good for consumer spending or bad for energy companies," said Craig Erlam, market analyst at Alpari, London.

Global crude prices have plunged in recent weeks on massive oversupply, raising fears that deflation could hit economies around the world. [O/R]

A spate of China data added up to more concerns for investors, with factory growth slowing more than expected last month to its second-worst reading since the global crisis and investment expansion hovering near a 13-year low.

CORE GOVERNMENT BONDS RISE

All those concerns about deflation and slowing output helped inflows into ultra-safe German government bonds.

German 10-year yields -- the euro zone benchmark -- dipped to a record low of 0.646 percent. Yields moved lower after weak demand for the European Central Bank's cheap bank loans on Thursday highlighted the problems it faces in inflating its balance sheet towards its intended 3 trillion euro target.

Bond traders said European debt markets were taking momentum from an overnight rally in U.S. Treasuries. Falling oil prices had seen investors switch out of stocks into bonds during the U.S. session, creating strong demand for a 30-year bond sale.

Earlier, Japan's Nikkei stock average ended up 0.7 percent, extending gains as robust U.S. retail sales data lifted exporter shares, but they still managed to book a loss of 3.1 percent for the week.

One potential risk to the U.S. economy was reduced, at least temporarily, as the Senate approved a two-day extension of government funding late on Thursday to stave off shutdowns of federal agencies that otherwise would have begun at midnight.

Spot gold slipped about 0.7 percent to $1,219.50 an ounce, though it was still on track for a gain of over 2 percent for a week in which it reached a seven-week high, on Wednesday.

"The oil decline has tended to be negative for bullion but should oil prices move below $60 and the broader financial markets become worried about the impact of lower energy prices globally, then gold may receive some safe-haven-inspired buying," HSBC analysts said in a note.

(Additional reporting by Adam Rose, A. Ananthalakshmi and John Geddie)