Stocks dip as markets hedge bets ahead of Fed, ECB

NEW YORK Tue Jul 31, 2012 4:58pm EDT

A trader poses in front of a screen on a trading floor in London January 22, 2010. REUTERS/Stefan Wermuth

A trader poses in front of a screen on a trading floor in London January 22, 2010.

Credit: Reuters/Stefan Wermuth

NEW YORK (Reuters) - U.S. stocks fell on Tuesday while European shares snapped a three-day winning streak and oil slipped on fear that central banks may not deliver enough stimulus to quell concerns about a global slowdown.

Equities and oil had been climbing steadily since European Central Bank President Mario Draghi said last week he would do whatever it took to save the euro. Markets began betting the ECB could announce at its Thursday meeting plans to lower Spanish and Italian borrowing costs by buying those countries' bonds.

Flagging growth in the United States had also raised hopes the Federal Reserve, which began a two-day meeting on Tuesday, would step up bond purchases of its own, though most economists expect it to hold its fire until September.

Data showing a fourth straight month of higher U.S. home prices and improved consumer confidence may make it easier for the Fed to wait, traders said.

"The markets have run ahead of themselves. And I think certainly the ECB and the Federal Reserve will hold back from pumping in more money at this point in time," said Manoj Ladwa, head of trading at TJ Markets.

Neither central bank is expected to stay on the sidelines for long, though, and that has pulled the euro off two-year lows and underpinned U.S. stocks' best year-to-date rise since 2003.

Though the three major U.S. stock indexes fell Tuesday, all of them booked gains in July, with the S&P 500 up 1.3 percent.

The euro was last up 0.3 percent at $1.2302. U.S. government bonds seesawed for most of the session, ending up slightly higher on the day. The benchmark 10-year Treasury note rose 7/32 in price to yield 1.48 percent.

But some traders said the ECB may not be able to live up to expectations, particularly if news from the debt-stricken euro zone continues to worsen.

Capital flight from Spain gathered pace in May while the central government's deficit widened, raising fears that the country may soon need a full-scale bailout.

"Everybody is waiting for Thursday to see if Draghi can deliver," said Lex van Dam, hedge fund manager at Hampstead Capital, which manages $500 million of assets. "He'd better pull a big rabbit out of his hat."

Internal debate within the ECB could mean that bold action is still weeks away.

"There is a clear danger that expectations might be too high," said Nick Parsons, head of market strategy at nabCapital in London.

The safe-haven German bond market reflected those concerns as the premium investors demand to hold Spanish 10-year bonds over German ones widened.

FADING MOMENTUM

European shares, which were heading for their best month since October after soaring more than 5 percent in the last three sessions, went into reverse. The FTSE Eurofirst 300 index .FTEU3 fell 0.9 percent.

Investors were unnerved by weaker-than-expected earnings from Deutsche Bank (DBKGn.DE) and other major banks. The euro zone's ongoing debt crisis has hurt revenues.

In U.S. markets, the Dow Jones industrial average .DJI was down 64.33 points, or 0.49 percent, at 13,008.68. The Standard & Poor's 500 Index .SPX was down 5.98 points, or 0.43 percent, at 1,379.32. The Nasdaq Composite Index .IXIC was down 6.32 points, or 0.21 percent, at 2,939.52.

With 321 of S&P 500 companies having reported quarterly earnings, 67.3 percent have beaten analysts' expectations. The average over the past four quarters is 68 percent.

But disappointing results from large companies such as handbag maker Coach Inc (COH.N) put some investors on edge. Coach shares slumped 18.6 percent to $49.33.

"This, coupled with headlines from Europe that won't go away and fears that China is slowing down means you have managers who would like to watch the action versus participate in the action," said Andrew Frankel, co-president of Stuart Frankel & Co.

What's more, data showing a fall in inflation-adjusted consumer spending in June underscored the economy's loss of momentum as the second quarter ended.

"Consumers are afraid," said Matthew Lifson, analyst at Cambridge Mercantile Group in Princeton, New Jersey. "This data suggests the U.S. economy is stagnant overall."

That should keep future Fed action in focus, analysts said.

CONCERN IN COMMODITY MARKETS

Commodity markets, too, are concerned about the health of the global economy as Europe's debt crisis and slowing growth in China and the United States weigh on demand.

That has put stress on major Asian exporters, including Japan, Taiwan and South Korea.

But commodities got some support from an official Xinhua news agency report quoting Chinese Premier Wen Jiabao as saying that China would increase fiscal and monetary policy support to the economy in the second half of the year.

Brent crude, which chalked up its biggest monthly gain in July since February, shed $2.06 to $104.14 a barrel, while U.S. crude fell $2.40 to $87.38 a barrel.

Even after two days of losses, though, Brent crude ended July up more than 7 percent, while U.S. crude posted a 3.65 percent monthly gain.

Spot gold fell $7.43 to $1,613.00 an ounce in muted trade ahead of the ECB meeting. Prices were still on track for a second straight monthly rise.

(Additional reporting by Anna Louie Sussman and Wanfeng Zhou in New York and Tricia Wright and Michael Szabo in London; Editing by Kenneth Barry and James Dalgleish)

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