Stocks Give Up Early Gains, Head Modestly Lower


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The markets gave up modest gains and fell into the red as traders weighed downbeat economic developments, with optimism Europe will be able to contain its widening debt crisis.

Today's Markets

As of 9:55 a.m. ET, the Dow Jones Industrial Average fell 13.8 points, or 0.1%, to 11,389, the S&P 500 dipped 1.3 points, or 0.11%, to 1,203 and the Nasdaq Composite slid 2.7 points, or 0.11%, to 2,610.

Wall Street is off to a rocky start this week, with the Dow sinking more than 100 points on Monday, and breaking a five-day winning streak.  The focus once again has become Europe's deepening sovereign debt crisis.  In particular, fears that Greece wouldn't receive a roughly $10 billion tranche of aid due next month, which would likely cause the embattled country to default, sent the blue chips tumbling 250 points at the lows of the session.

However, those concerns eased toward the end of the session and into Monday evening after Greek officials said they made significant progress toward reaching an agreement with European inspectors on making bigger cuts to its budget deficit.

Standard & Poor's slashed Italy's sovereign debt rating by one notch to "A," in a move that came earlier than expected.  The ratings company cited a weakening political and economic environment in its decision to make the move.  Additionally, S&P kept its outlook at negative, meaning another downgrade could be on the horizon for Europe's third-largest economy.

Despite European markets largely shrugging off the move, economists that focus on Europe have said this is yet another setback for the currency bloc, which has been in the throes of a debt crisis for months.

"Contagion risks (or the risk the crisis could spread to other countries) remain elevated, and the market's [skepticism] extends beyond Italy and now questions the survival of the euro area itself," economists at Barclays Capital wrote in a research note.

Focus on Economics 

Data on the housing market was mixed on Tuesday.  Housing starts tumbled 5% -- the biggest decline since April -- to an annualized unit rate of 571,000 last month, much weaker than the 590,000 economists forecast.  Meanwhile, permits to build new homes climbed 3.2% to an annualized unit rate of 620,000, topping calls for 590,00.  Indeed, the number of new permits, a slightly more forward-looking number, was the highest since December.

Home building has been slow to recover from the economic downturn as mortgage conditions have remained tight, and the supply of homes on the market has remained high. Home builders such as Toll Brothers (NYSE:TOL) and KB Home (NYSE:KBH) may be particularly affected by these data.

Also on the economic front, the International Monetary Fund slashed its expectations for global, and U.S. growth on Tuesday.  The IMF's new forecast for 2011 economic expansion is 1.5%, one percentage point lower than its previous estimate.  The next year, the organization now expects the U.S. economy to expand at 1.8%, also below its initial forecast.

The Federal Reserve starts its two-day monetary policy meeting on Tuesday.  The central bank is widely expected to commence another round of economic stimulus in light of stalling economic expansion in the U.S. and abroad.

"Although not a done deal, we see a high probability that the Federal Open Market Committee ... will announce further easing steps at the conclusion of this week’s meeting," economists at Goldman Sachs wrote in a research note.

Economists are expecting the Fed to embark on a program that has been widely dubbed as "Operation Twist," wherein the central bank would sell short-term Treasury bonds and buy longer term ones, effectively lengthening the maturity of its balance sheet .

The Fed's final decision is expected at roughly 2:15 p.m. ET on Wednesday.

In currencies, the euro gained 0.19% against the U.S. dollar, while the greenback fell 0.13% against a basket of world currencies.

Energy futures were mixed.  Light, sweet crude climbed 16 cents, or 0.19%, to $85.86 a barrel.  Wholesale RBOB gasoline slipped less than a penny to $2.69 a gallon.

Gold jumped $16.20, or 0.91%, to $1,795 a troy ounce.  The yield on the benchmark 10-year Treasury note was up to 1.985% from 1.949%.

Foreign Markets

The English FTSE 100 rose 0.62% to 5,293 and the German DAX jumped 1.3% to 5,487.

In Asia, the Japanese Nikkei 225 slumped 1.6% to 8,721 and the Chinese Hang Seng ticked higher by 0.51% to 19,015.