US stocks gave up early gains on Tuesday as equity investors were unsettled by a sudden spike in crude oil prices above $100 a barrel sparking concerns that businesses would be hit with higher costs.
Soaring oil prices also raised the spectre of renewed inflationary pressures prior to today's consumer price index reading.
Although oil producers and miners were buoyed by the jump in raw materials, the run-up in crude hurt the transport, industrial and consumer sectors.
US banks also finished in negative territory as confidence was shaken by Credit Suisse's admission of "pricing errors" and as Standard & Poor's downgraded $13.8bn in US collateralised debt obligations.
The S&P 500 closed 0.1 per cent lower at 1,348.78, having risen 1.3 per cent. The Nasdaq Composite fell 0.7 per cent to 2,306.20 while the Dow Jones Industrial Average slipped 0.1 per cent to 12,337.22.
"[It was] not a good day from an inflationary standpoint. All the commodities are just screaming, which is obviously inflationary. That doesn't help the Fed to cut rates," said Tom Schrader, managing director of US equity trading at Stifel Nicolaus Capital Markets.
The futures market trimmed limited expectations for a 75bp easing at the Federal Reserve's March meeting, but continued to price in a 50bp cut.
Retail stocks were among the worst affected by rising oil prices in spite of a broadly positive earnings update from Wal-Mart (NYSE:WMT) The US's biggest retailer said net income rose 4 per cent to $4.1bn in the fourth quarter while sales topped $100bn.
Wal-Mart said customers were more cautious in January and its current quarter guidance lagged some analysts' estimates. The shares rose 0.4 per cent to $49.66 but the broader S&P retail index fell 1.4 per cent to 389.15. OfficeMax (NYSE:OMX), added 5.1 per cent to $23.27 after the office supplies retailer reported a better-than-expected earnings.
Energy and mining companies were the lone beneficiaries of surging raw materials prices. Among the biggest movers yesterday was Peabody Energy (NYSE:BTU), up 6 per cent at $58.97. Chevronrose 1.5 per cent to $84.83 on its first day as a member of the Dow Jones Industrial Average.
In mining Freeport McMoran Copper & Gold, 5.1 per cent higher at$97.94, was one of the chief beneficiaries of a spike in gold and copper prices. United States Steel (NYSE:X)rose 2.7 per cent to $106.87 after UBS upgraded the shares from "neutral" to "buy".
Energy stocks have fared poorly this year, after a bumper performance in 2007, as concerns about margin pressures and a global economic downturn increased. Although some analysts remain bullish on energy, Richard Bernstein, chief investment strategist at Merrill Lynch, noted a high proportion of earnings misses and said the sector was primed for a sustained period of underperformance.
The outlook for US financial firms will also be a key test for US equities in coming weeks. Some analysts have grown more confident that equities will not retest the lows reached in January, but credit markets continue to point to heightened risks.
Banks came under pressure yesterday after Credit Suisse took a $2.85bn writedown on its asset-backed investments and said it had found "pricing errors" on its books. The news unsettled analysts who had previously lauded the company for largely avoiding subprime damage.
Lehman Brothers (NYSE:LEH), down 2.2 per cent at $53.57, was among the worst performing brokers after the Wall Street Journal said the bank could face losses on its commercial real estate loans portfolio. Bear Stearns (NYSE:BSC)fell 3.4 per cent to $80.02.
Bond insurers remained a source of market concern asMBIA (NYSE:MBI) said Joseph Brown was returning as chairman and chief executive, replacing Gary Dunton, who resigned. The company is scrambling to avoid a potentially debilitating credit downgrade. The shares slipped 4.4 per cent to $11.70.
Telecoms companies closed sharply lower after Verizon Wireless unveiled an unlimited calling plan, raising the prospect of renewed price competition in the mobile sector. AT&T fell 5.3 per cent to $35.89.
In technology, Yahoo's shares fell 2.2 per cent to $29.01 after Bill Gates said Microsoft's $31-a-share bid was a "fair offer".