Rising price of crude renews US inflation fears

Wall Street staged a dramatic retreat followed by a gradual recovery all in the space of a shortened trading week.

By Friday’s close, the Dow Jones Industrial Average was up 0.9 per cent at 10,841.75, as the S&P 500 index inched up 0.9 per cent to 1,211.41. The Nasdaq Composite was 0.7 per cent up to 2,065.40.

For the week, the Dow was up 0.5 per cent and the Nasdaq added 0.3 per cent, while the S&P 500 index was 0.8 per cent.

Returning from a long-holiday weekend, investors started the week weighed by news that the Korean central bank intended to decrease its exposure to the US dollar and assets denominated in the dollar.

The subsequent and swift decline in the dollar, amid a recent bout of cold weather in Europe and the US, led to a surge in crude prices to above $51 per barrel.

Rising crude prices renewed concerns about inflationary pressures in the US economy and the danger of interest rates rising at a faster pace than investors are anticipating.

Data showing a slower than expected rise in consumer prices helped remind investors that optimism is Wall Street’s default setting and pushed indices into a rally that helped stocks regain much of their terrain.

Arthur Cashin, the ever-sceptical managing director at UBS and self-described ‘old fogey’ trader, likened the market to a “patient uncertain of his stamina . . . you can almost see the market taking its temperature and checking its pulse as the tape moves along”.

Bullish market watchers continued to remind investors that they have been ignoring sharp earnings growth in the past year and that price/earnings ratios have stayed at 2002 and 2003 levels as a result, and could be ripe for expansion.

An upward revision of fourth-quarter gross domestic product helped reassure investors the US economic recovery was on track.

Ongoing merger news continued to help sentiment during the week, as did the market’s realisation that rising energy prices could help companies in the sector.

Accredo Health, the drug store services provider, saw shares gain almost 40 per cent on Wednesday on news it had agreed to be taken over by Medco Health Solutions, whose stock slipped 0.7 per cent.

Kerr McGee shares rose 5.3 per cent on Tuesday after Carl Icahn, the financier, announced his intention to invest up to $1bn in the oil group. Meanwhile Valero Energy rose 1.8 per cent in the same session.

Shares in Google retreated 2.6 per cent on Thursday while Yahoo gave up 2 per cent after a downgrade of the two stocks by an analyst at RBC Capital Markets. Google shares have been a star performer after the initial public offering last year

Less upbeat activity came from the drugs sector, where an $8bn deal by Novartis, of Switzerland, to buy a generic drugmaker reminded investors of the stiff competition faced by pharmaceutical groups from makers of less expensive generic drugs, just as their branded ones stand to lose patent protection. Merck gave up 4.3 per cent on Tuesday as Pfizer lost 0.8 per cent, after both saw buying late in the prior week on news that regulators were set to approve the sale of painkillers that had been linked to heart conditions.

Semiconductors see-sawed throughout the week, with Advanced Micro Devices losing 2.4 per cent on Wednesday only to gain more than 6 per cent in the following session. The sector has been beset with concerns about future demand for chips.

Retailers closed off the earnings season and some received the cold shoulder from a fickle market. Home Depot shares slipped 4 per cent on Tuesday despite the group announcing a 10 per cent rise in earnings, while shares in Lowe’s, its chief rival, rose slightly in the following session after it announced a 27 per cent increase in profits.

Ongoing talks between May Department Stores and Federated Department Stores continued to attract attention. Shares in May rose 4.4 per cent yesterday as Federated eased 0.4 per cent amid reports the two companies’ boards were scheduled to meet and finalise a merger.

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