Wall Street stocks retreated again on Wednesday during a volatile session in which Intel (NASDAQ:INTC)'s earnings figures prompted another bout of selling in the technology sector.
Materials and energy companies also came under pressure as crude oil briefly dipped below $90 a barrel and traders bet that a weakened US economy would cause demand for commodities to slump.
The market was split with financial stocks enjoying a bounce after JPMorgan cheered the investors by avoiding severe subprime-related losses. However, Ambac Financial, the bond insurer, fell sharply after it slashed its dividend to shore up capital reserves.
Retail names also rallied as traders went bargain hunting in discount and department store names. Meanwhile, traders also rushed to cover short positions in the beaten-down homebuilder sector.
A late sell-off left the S&P 500 down 0.6 per cent at 1,373.20, its lowest close since November 2006. The tech-heavy Nasdaq Composite fell 1 per cent to 2,394.59 while the Dow Jones Industrial Average slipped 0.3 per cent to 12,466.16.
However the Russell 2000 small-cap index advanced 0.4 per cent to 699.91 but remains 18 per cent below its July peak.
Large-cap technology stocks sold off in early trading after Intel's quarterly profits lagged Wall Street's expectations and its fiscal first quarter revenue outlook disappointed analysts. The shares fell 12.4 per cent to $19.88 as brokerages cut price targets on the stock.
Expectations of bumper earnings growth made tech a stand-out sector in 2007 but the Nasdaq Composite has fallen 9.7 per cent this year with the PHLX semiconductor sector index down 12.7 per cent.
Fourth quarter earnings are expected to hold up well, averaging gains of more than 20 per cent. But Todd Salamone, vice-president of research at Schaeffer's Investment Research, warned that the bulls could set the sector up for a fall.
He said: "The tech sector is expected to have strong earnings growth so it may have more trouble beating estimates."
BEA Systems (NASDAQ:BEAS) was a bright spot, soaring 18.5 per cent to $18.46 after Oracle (NASDAQ:ORCL) agreed to buy the business software company for $8.5bn. Oracle's shares rose 2.9 per cent to $21.92.
The financial sector rebounded after JPMorgan's results revealed much less exposure to subprime damage than some of its rivals. Fourth quarter earnings fell 34 per cent to $2.97bn, worse than expected, as the bank took a $1.3bn writedown on mortgage investments.
However JPMorgan's problems were small compared with the $18.1bn in writedowns that Citigroup (NYSE:C) revealed on Tuesday. Citi reported a $9.8bn fourth quarter loss and revealed a sharp rise in consumer credit costs. JPMorgan's shares rose 5.8 per cent to $41.43 but Citi fell 2.6 per cent to $26.24. Merrill Lynch, expected to reveal heavy losses on Thursday, rose 3.9 per cent to $55.09.
Also reporting on Wednesday, Wells Fargo, up 3.3 per cent at $27.37, said fourth quarter profit fell 38 per cent, in line with expectations.
Shares in Ambac Financialplunged 38.7 per cent to $12.97 after the bond insurer said it would raise $1bn in new capital and slash its dividend to help preserve its triple-A rating. Ambac also said it expects to take a $5.4bn pre-tax writedown for the fourth quarter. MBIA (NYSE:MBI), a rival, fell 16.5 per cent to $13.40.
Investors took profits in the agribusiness sector, which escaped the worst of the new year sell-off on hopes that the global food price boom would offset a slowing US economy. Monsanto (NYSE:MON) fell 8.6 per cent to $112.70 and Mosaiclost 9.4 per cent to $91.71.
Energy and materials were the worst performing of the S&P 10 leading sectors as traders priced in waning US demand. National Oilwell Varco (NYSE:NOV) gave up 6.1 per cent to $64.14 while Freeport-McMoRan Copper & Gold fell 6.6 per cent to $88.63. However falling crude prices were a boon for the struggling transport sector, with truckers and airlines receiving a boost.
A comparatively modest increase in consumer price inflation in December, which rose 0.3 per cent compared to expectations of a 0.2 per cent uptick, may leave the door open for the Fed to cut interest rates aggressively, as the futures market now expects.
David Greenlaw, economist at Morgan Stanley, said: "The Fed is now clearly downplaying the emphasis on inflation while raising their focus on the downside risks".
The Federal Reserve's Beige Book regional survey showed the US economy continued to grow at the end of last year, but at a slower pace, providing some comfort to investors fearing a recession.
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