After another week of gains, Wall Street reversed course on Monday as the prices of crude oil and metals fell back.
The early losses followed a week in which the Standard & Poor’s 500-stock index gained more than 2 percent, and the Dow Jones industrial average rose 3 percent, shored up by slight improvement in the housing market and construction industry, and by signs that employers were not slashing jobs quite as fast as earlier this year.
The Dow sank 86 points or about one percent while the broader S.&P. 500 was also about one percent lower. The technology-heavy Nasdaq slid 1.1 percent as rivals Microsoft and Apple both lost ground.
“We’re getting some consolidation, but generally, the tone continues to be even better even during the sell-offs,” said Andy Brooks, head of United States equity trading at T. Rowe Price, “You wake up Monday, say, ‘Boy that was a good week last week,’ take a little bit off the table, and continue to plow ahead.”
Commodities ranging from gasoline to soybeans to cotton and gold have raced higher in recent weeks as investors place bets that an economic recovery is around the corner, and that business will soon need to use more raw materials to ramp up production and meet rising consumer demand.
Some of those bets were unwound in early trading. Crude oil futures slipped 32 cents to $68.12 a barrel, and the price of gold fell nearly $15 to $947 an ounce. Gold and oil, which are traditional safeguards for investors worried about inflation, have surged as the value of the dollar falls against other currencies and investors grow concerned about record new supplies of Treasury notes hitting the market.
As commodity prices retraced some of their climb, companies that make basic materials like chemicals and metals fell the most. Financial companies were down slightly as investors waited for details from the Federal Reserve about whether major banks will be allowed to repay portions of their government bailouts.
On Monday, traders put their worries about inflation and big government deficits onto the back burner, and pushed the price of longer-term government bonds slightly higher. The yield on the benchmark 10-year note fell to 3.81 percent from 3.83 percent on Friday.
Despite the slight increase in Treasury prices on Monday — which pushes the yield lower — interest rates on government debt are close to their highest point since mid-November, and many analysts expect them to climb as the economy continues to heal and investors deploy their money to riskier purchases that promise greater returns.
Stock markets have raced higher since late winter as the economy finally began to show signs of nearing a bottom, but analysts said that a fevered rally that lifted the S.&P. 500 some 30 percent off its 12-year lows is beginning to cool. Investors are not as worried about a financial calamity, but they are still wary about the economy’s chances for recovery, especially if interest rates spike, home foreclosures pile up and gasoline prices crimp consumer spending.
“Do housing prices stabilize? Do rates hold here? If mortgage rates go back up, do we have a relapse?” said Bill Schultz, chief investment officer at McQueen Ball. “The market now is taking a more balanced view. We’re better, but we’re not quite out of the woods yet.”
Oil prices dropped below $68 Monday as a rally that has roughly doubled the price of crude in four months lost some steam in the face of economic reality. Crude prices have risen in tandem with stocks as gloom about the global economy eases. But there is growing sentiment that the oil market may have overreached.
Benchmark crude for July delivery was down 85 cents at $67.59 a barrel in electronic trading on the New York market.
“I don’t see the rally that we’ve had over the last couple of months as being sustainable,” said John Vautrain, energy analyst at consultancy Purvin & Gertz in Singapore. “Inventories are still growing and OPEC production cuts haven’t been big enough to offset that. The major economies are still weak and we are still losing demand.”
In the credit markets, the cost of three-month dollar loans between banks rose from record lows on expectations that the worst of the recession is over and that the Federal Reserve may start to lift borrowing costs sooner rather than later.
The British Bankers’ Association said the rate on three-month loans in dollars — known as the London Interbank Offered Rate, or Libor — rose 0.02 percentage points to 0.65 percent.
Though the Federal Reserve is expected to keep its benchmark rate unchanged at a range between zero and 0.25 percent for a few months yet, the markets are beginning to price in the possibility that rates may start to rise by the start of next year if the recent improving economic dataflow continues.
However, many economists think the market’s expectations of tighter monetary policy are overdone and premature given the lack of near-term inflationary pressures.
“Markets have now moved to pricing in a U.S. rate hike by year end which we believe is wildly premature given the likely absence of inflation pressures for many months to come,” said Mitul Kotecha, an analyst at Calyon Credit Agricole.
