Stocks fade as economic fears take over market

Updated: 3:56 a.m. ET, Friday

What looked like quite a nice stock market rally for most of the day stalled out in late-day trading Thursday.

The Dow Jones industrials ($INDU) finished with a modest gain after rising as many as 140 points in the morning. The Standard & Poor's 500 Index ($INX) and the Nasdaq Composite Index ($COMPX) saw three days of gains end abruptly. The late-day swoon may make for a difficult day on Friday. Crude oil (-CL) in New York and London moved lower in the afternoon. Gold (-GC) fell below $1,600 an ounce

The market had opened sharply higher on optimism built on China's surprising decision to cut interest rates. But the consumer credit report added to disappointment with Federal Reserve Chairman Ben Bernanke's congressional testimony Thursday. Bernanke warned that Europe's financial crisis poses "significant risks to the U.S. financial system and economy and must be monitored closely." But he promised only that the Fed would act if needed. But Wall Street wanted to hear that the Fed was raring to go.

It turned out later that global markets were hoping for more from Bernanke as well and were also upset by a downgrade of Spanish debt. Stocks in Asia were lower Friday in apparent response to the Fed chief's comments. European stocks were mostly lower in early Friday trading; Greece was an exception. Oil and gold futures sagged, and futures trading suggested a down open for U.S. stocks as well.

The Dow closed up 46 points to 12,461, the blue chips' third gain in a row, admittedly a good sign. The S&P 500, however, was down slightly at 1,315. The Nasdaq dropped 14 points to 2,831.

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Technology shares were a contributor to the market fade, with weakness in key stocks such as Oracle (ORCL), Microsoft (MSFT) and Cisco Systems (CSCO). (Microsoft publishes MSN Money.)

Facebook (FB) was off 50 cents to $26.31 after dropping to as low as $26.15. The shares had reached $27.08 in the midafternoon before slipping again.

The Nasdaq-100 Index ($NDX), which tracks the largest Nasdaq stocks, was off 11 points to 2,535. The index had been up as many as 24 points. Apple (AAPL), which represents more than 15% of the index's market capitalization, was up just 26 cents to $571.72

What finally pulled the market way back was investor dismay with a report showing consumers took out less credit than expected in April, another signal that the economy is sputtering. The Federal Reserve said that consumer credit outstanding grew $6.5 billion in April, compared with expectations of a $12 billion gain. The Fed said March credit outstanding grew $12.4 billion, down from an original estimate of $21.4 billion,

Financial stocks, especially those of large global institutions, sagged after the Federal Reserve released a proposal to enact an international agreement on higher capital standards for banks, known as Basel III. The proposal largely rejects pleas from the U.S. banking industry to soften parts of the new standards. Morgan Stanley (MS) was among the hardest hit, down 53 cents to $13.41.

After today's close, Fitch Investors downgraded Spanish debt to BBB from A. The agency had previously seen the country benefiting from a mild recovery in 2013, but now sees recession for the next two years. Between that and the cost of recapping the banks, Fitch sees Spain's debt-to-GDP ratio topping out at 95% in 2015, compared with 82% at its last forecast.

Crude oil gives up its gains
Crude oil had reached as high as $87.03 a barrel on the China news but fell back during the day, settling at $84.82, down 20 cents. Brent crude fell back under $100 to $99.55, off $1.09 a barrel.

Natural gas (-NG) futures, heating oil (-HO) and wholesale gasoline (-RB) also fell.

The national average price of gasoline dropped to $3.56 a gallon from $3.565 on Wednesday, said AAA's Daily Fuel Gauge Report. That's down 9.6% from the 2012 peak in early April but still up 8.7% for the year.

Gold settled down $46.20 to $1,588 an ounce. Silver was off 95.9 cents to $28.529 an ounce.

Interest rates were flat; the 10-year Treasury yield was at 1.654%, up very slightly from 1.651% on Wednesday. The dollar was lower against major currencies.

Energy prices -- New York close
			Thur.			Wed.			Month chg.			YTD chg.
Crude oil (-CL)			$84.82			$85.02			-1.98%			-14.18%
(per barrel)
Heating oil (-HO)			$2.6671			$2.6717			-1.34%			-8.48%
(per gallon)
Natural gas (-NG)			$2.2740			$2.4210			-6.11%			-23.92%
(per mil. BTU)
Unleaded gasoline (-RB)			$2.6850			$2.6903			-1.38%			1.04%
(per gallon)
Brent crude			$99.93			$100.64			-1.90%			-6.94%
(per barrel)
Retail gasoline			$3.5600			$3.5650			-1.66%			8.67%
(per gallon; AAA)

Bernanke says the Fed is ready if needed
The Fed chairman's testimony before the Joint Economic Committee was widely anticipated and a disappointment. That may reflect a problem with Wall Street, which was hoping Bernanke would at least hint another stimulus move was near.

The crisis in Europe has affected the U.S. economy, he said, acting as a drag on exports, weighing on business and consumer confidence, and pressuring financial markets and institutions.

But Bernanke basically said the Fed stood ready to stimulate the economy if things deteriorate. But he pointedly did not say that was warranted at this time. Instead, he said the Fed "remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate."

Since the Fed has cut interest rates basically to zero, about all it can do is what it is doing. That's selling short-term Treasury securities and buying longer-term issues. A small program of reinvesting maturing securities, called Operation Twist, is due to expire in June.

The Street was hoping that last week's weak jobs report would be a good-enough trigger, but there are a number of members of the Fed's rate-making body, the Federal Open Market Committee, who fear that the Fed's moves may unleash new bouts of inflation.

What Bernanke did, however, was warn that the fiscal cliff is coming -- where legislation passed last summer would force across-the-board spending cuts while Bush-era tax cuts expire. Rapid cutting of federal spending would trim the economy's sails quite a bit.

What he wants is a fiscal policy that protects the economy now but brings deficits down in the long run. Congress needs to act, he said. The Fed can't do it all.

To push the point further, Fitch Ratings executives warned the ratings agency would downgrade the nation's triple-A credit rating if the government doesn’t get its fiscal house in order. A potential downgrade could send shockwaves through financial markets, similar to how S&P jolted markets last summer when it stripped the U.S. of its top credit rating.

Jobless claims drop for first time in five weeks
Separately, the Labor Department reported that initial jobless claims fell 12,000 in the latest week to 377,000 after four weeks of increases.

The news was better than expected, and some economists expect the weekly numbers to fall in the coming weeks largely because gasoline prices are coming down.

China worries about a softening economy
China’s 25-basis-point (0.25%) cut in benchmark lending rates on Thursday surprised  economists and financial markets. Many economists said they thought the rate cut is a signal the economy is slowing faster than previously thought.

"Policymakers are going all out to shore up the economy," wrote Mark Williams, chief Asia economist at Capital Economics in London.

China has been raising rates fairly steadily since the worst of the 2008-09 financial crisis eased because of worries about an overheated real -estate market. There were two rate increases in 2010 and three in 2011.

China's economic growth was a big reason why markets recovered as rapidly as they did after the 2009 market bottom.

Seven of the 10 S&P 500 sectors were higher, but two of the biggest sectors -- financial and technology -- fell back. Utilities and industrial stocks were the leaders.

United Technologies, Procter & Gamble and Boeing lead the Dow
Sixteen of the 30 Dow stocks were higher, led by United Technologies (UTX), Procter & Gamble (PG) and Boeing (BA). Bank of America (BAC) and Hewlett-Packard (HPQ) were the laggards.

Meanwhile, just 212 S&P 500 stocks were higher. The leaders were utility Exelon (EXC), Goodyear Tire & Rubber (GT) and Marathon Petroleum (MPC). The laggards were networking company Juniper Networks (JNPR), natural-gas producer WPX Energy (WPX) and chip-maker Advanced Micro Devices (AMD).

Only 26 Nasdaq-100 stocks were higher, led by Research In Motion (RIMM) and Baidu (BIDU), the Chinese Internet company, up 38 cents to $10.72 and $3.34 to $122.46, respectively. Seagate Technology (STX) and Randgold Resources (GOLD) were the laggards).

Best Buy and Lululemon shares take a hit
Best Buy's (BBY) shares were down 19 cents to $19.70 after Richard Schulze, its founder and biggest shareholder, said he is resigning as chairman to "explore all available options" for his 20.1% stake in the electronics retailer. He had planned to step aside as chairman in June and leave the board after the 2013 annual meeting.

While a private sale would be the most likely transaction for Schulze’s shares, his public announcement to seek options would imply little interest so far from private equity buyers, Bloomberg News said. The Minneapolis Star-Tribune suggested Schulze ultimately wants to take the company private, but that would require raising $12 billion or so to make a deal work.

Lululemon Athletica (LULU), the Vancouver-based yoga-wear retailer, declined the most in six months after projecting full-year earnings and sales that trailed analysts’ estimates. Lululemon fell $6.18 to $63.84. The shares had soared 50% this year through yesterday.

Full-year profit will be as much as $1.60 per share, the company said Thursday. Analysts had been projecting $1.63. Revenue will total as much as $1.34 billion, a touch less than the consensus estimate of $1.35 billion. In March, Lululemon had projected full-year profit of as much as $1.57 a share on sales of a maximum of $1.33 billion.

Short hits from the markets -- New York close
			Thur.			Wed.			Month chg.			YTD chg.
Treasury yields
13-week Treasury bill			0.0800%			0.080%			14.29%			700.00%
5-year Treasury note			0.715%			0.726%			6.56%			-13.86%
10-year Treasury note			1.654%			1.651%			4.62%			-11.60%
30-year Treasury bond			2.757%			2.720%			3.18%			-4.57%
Currencies
U.S. Dollar Index			82.106			82.379			-1.23%			1.97%
British pound			1.5540			1.5540			0.82%			0.02%
(in U.S. $)
U.S. $ in pounds			£0.643			£0.643			-0.82%			-0.02%
Euro in dollars			$1.26			$1.26			1.67%			-3.00%
(in U.S. $)
U.S. $ in euros			€ 0.796			€ 0.796			-1.64%			3.10%
U.S. $ in yen			79.81			79.67			1.60%			3.51%
U.S. $ in Chinese			6.39			6.36			0.13%			1.00%
yuan
Canada dollar			$0.974			$0.973			0.52%			-0.77%
(in U.S. $)
U.S. dollar			$1.028			$1.027			-0.52%			0.77%
(in Canadian $)
Commodities
Gold (-GC)			$1,588.00			$1,634.20			1.52%			1.35%
(per troy ounce)
Copper (-HG)			$3.371			$3.379			0.15%			-1.91%
(per pound)
Silver (-SI)			$28.5290			$29.4880			2.78%			2.20%
(per troy ounce)
Wheat (-ZW)			$6.4175			$6.2425			-0.31%			-1.69%
(per bushel)
Corn (-ZC)			$5.9400			$5.863			6.98%			-8.12%
(per bushel)
Cotton			$0.7129			0.6745			-0.78%			-22.24%
(per pound)
Coffee			$1.5840			1.58			-2.79%			-31.03%
(per pound)
Crude oil (-CL)			$84.82			$85.02			-1.98%			-14.18%
(per barrel)