US stocks grumble; commodities tumbles 16 June 2009

Monday Goes All Wrong For Wall Street

The major indices in New York shed more than 2% Monday, with U.S. losses in line with global declines, as oil sank and commodities pulled back in the face of a strengthening dollar.

The Dow down 187.13, or 2.1%, at 8612.13, while the S&P 500 was lower by 22.49, or 2.4%, to 923.72. The Nasdaq Composite gave up 42.42, or 2.3%, to 1816.38. The early-week selloff comes after the Dow moved into positive territory for the year on Friday, as all three major indices closed out another week with gains.

There was no late comeback for equities in New York Monday, as early losses grew during the session before the market closed near its worst levels. Just one session after turning positive for 2009 the Dow Jones industrial average was thrown back into negative territory with 28 of its 30 components in the red.

Stocks may have tumbled Monday but trading volume was light, suggesting an absence of buyers rather than a flood of sellers rushing to dump stocks. The slide began in Asia and Europe and spread to the U.S. as a strong dollar pushed commodities prices sharply lower. Stocks of energy and materials producers have been lifting the market in the past month so the drop in prices left stocks without an important leg of support.

Anxiety built over the weekend as finance ministers at the Group of Eight (G8) finance meeting in Italy discussed winding down economic stimulus, while International Monetary Fund chief Dominique Strauss-Kahn said that the world economy might yet feel the worst of the recession.

Stocks overseas were widely lower. In Europe, London's FTSE 100 and Frankfurt's Dax were down 2.6% and 3.5%, respectively. Japan's Nikkei lost 1%, while Hong Kong's Hang Seng gave up 2.1%.

Longer-dated Treasuries were rising in price. The 10-year was up 17/32, yielding 3.73%, while the 30-year was higher 1-2/32, to yield 4.58%.

The dollar firmed up against foreign currencies after comments out of Russia made it clear that the greenback's status as the world's reserve currency is not up for debate at a coming meeting of the BRIC countries (Brazil, Russia, India, China). The euro fell to $1.3793, from $1.3999, but the advance of the dollar also dented trading in commodities, particularly oil. Crude slid $1.42, to $70.62 a barrel and energy stocks took a hit with Exxon Mobil losing 1.3%. Falling aluminum prices sent Alcoa down 6.5%.

Oil has rallied over the last few months on expectations that an economic recovery will drive demand up. Crude prices have doubled since February despite weak demand and ample inventories, prompting some traders to question the motives behind the surge.

"For months the market has been banking on these two trends - equities and the dollar," said Tim Evans, energy analyst at Citi Futures Perspective. "We don't have any physical tightness so we've been counting on these other markets for support. The market needs to reevaluate whether it's a smart trade to assume the dollar is going to be weak."

A correction could take oil prices as low as $60 a barrel but would likely be a small blip in the move higher, said Stephen Davis, associate portfolio manager for the Alpine Mutual Funds in Purchase, N.Y. Soon enough, oil demand from growing economies will again begin to challenge new production capacity, sending prices higher, Davis said.

Market participants are following developments in Iran, where opponents of hardliner President Mahmoud Ahmadinejad took to the streets to protest his re-election.

The scale of political instability in Iran is not yet at a level to jeopardize oil infrastructure, said Cliff Kupchan, director of research at Eurasia Group. "If instability spreads and oil production is affected the impact on the oil market will be significant."

Investors are also keeping an eye on U.S oil inventory data for the week ended June 12, due out Wednesday from the Department of Energy. Inventories are expected to fall by 1.5 million barrels, while gasoline inventories are expected to rise by 800,000 barrels and distillate stocks, including heating oil and diesel, are seen increasing by 1.1 million barrels, according to a Dow Jones Newswires survey of analysts.