(Adds close of U.S. markets)
By Herbert Lash
NEW YORK, May 5 (Reuters) - U.S. stocks fell on Monday as
resurgent oil prices set a record over $120 a barrel and doubts
about Bank of America's plan to buy the largest U.S. mortgage
lender renewed concerns about the nation's economic health.
The jump in crude oil on supply concerns from OPEC members
Nigeria and Iran fanned fears about the outlook for consumer
spending and overshadowed a report that showed the U.S. service
sector in April defied expectations and posted its first
monthly gain this year.
The dollar, meanwhile, fell against the euro and the yen as
investors debated the strength of the U.S. economy amid the
high oil prices.
While the slip in U.S. stocks was the main driver of U.S.
Treasuries, bond bulls cut bets that the United States will
suffer a steep recession and expectations the Federal Reserve
will cut interest rates further due to the latest evidence of
economic resilience.
Financial shares fell after a brokerage said Bank of
America <BAC.N> is likely to renegotiate or even walk away from
its deal to acquire ailing mortgage lender Countrywide
Financial Corp <CFC.N>.
Countrywide shares tumbled 10.4 percent to $5.36 and pulled
the broader market lower on fears a scotched deal would show
the credit crisis is deepening and has not abated.
"If they were to walk away from this deal, what will that
mean? Will Countrywide have to file for bankruptcy? Will all
the Countrywide paper get dumped into the market? Nobody
knows," said Stephen Massocca, co-chief executive at San
Francisco-based investment bank Pacific Growth Equities.
"It may be that there are reasonable answers to all this,
but if that were to happen, that won't be good for the market,"
he said.
The Dow Jones industrial average <> was down 88.66
points, or 0.68 percent, at 12,969.54. The Standard & Poor's
500 Index <.SPX> was down 6.42 points, or 0.45 percent, at
1,407.48. The Nasdaq Composite Index <> was down 12.87
points, or 0.52 percent, at 2,464.12.
News that Microsoft Corp <MSFT.O> had dropped its offer to
buy Yahoo Inc <YHOO.O> for $47.5 billion added to investors'
pessimism. Yahoo <YHOO.O> slumped 15 percent to $24.37 and
Microsoft <MSFT.O> slipped 0.6 percent to $29.08.
Shares of Google <GOOG.O> rose 2.3 percent to $594.90 on
expectations it could benefit from Microsoft's failed takeover
bid. Yahoo was likely to push for an advertising partnership
with the Web search company, sources familiar with the matter
said.
European shares ended lower, breaking a three-day winning
streak, as techs and telecoms weighed and offset the impact of
the surprisingly strong U.S. service sector figures. With UK
markets closed for a public holiday, trading was thin.
The pan-European FTSEurofirst 300 <> index of top
European stocks ended down 0.3 percent at 1,357.99 points.
Tech stocks weighed in Europe after Microsoft's bid for
Yahoo fell apart. Chip equipment maker ASML <ASML.AS> lost 2.3
percent, while in the telecoms sector, Alcatel-Lucent <ALUA.PA>
lost 1.9 percent; Ericsson <ERICb.ST> shed 1.1 percent and
Nokia <NOK1V.HE> lost 1.5 percent.
Stocks got a brief fillip from data that showed the U.S.
service sector grew unexpectedly in April, snapping a
three-month period of contraction, and adding to signs that the
United States might skirt a recession.
The Institute for Supply Management's non-manufacturing
index rose to 52.0 versus 49.6 in March. ISM's jobs gauge for
the sector posted its biggest improvement in seven months but
inflation pressures were at a five-month high.
"The report is consistent with the trend we have been
seeing that the U.S. economy is not as disappointing as many
initially thought," said Nick Bennenbroek, head of foreign
exchange strategy at Wells Fargo in New York.
U.S. Treasury debt prices mostly rose as financial shares
pulled stocks lower and boosted investor demand for lower-risk
assets like government debt.
The benchmark 10-year U.S. Treasury note <US10YT=RR> rose
2/32 to yield 3.85 percent. The 2-year U.S. Treasury note
<US2YT=RR> rose 2/32 to yield 2.42 percent. The 30-year U.S.
Treasury bond <US30YT=RR> fell 4/32 to yield at 4.59 percent.
The dollar extended losses as uncertainty about the outlook
for the economy kept investors wary of declaring a sustained
dollar recovery.
The euro rose 0.4 percent to $1.5489 <EUR=>, shrugging off
earlier data showing euro zone investor morale had unexpectedly
weakened in May. Investors were far more concerned with the
expected trajectory of European Central Bank interest rate
policy.
With food and energy costs on the rise, ECB President
Jean-Claude Trichet warned again on Monday of "significant"
inflation risks, suggesting benchmark rates would likely stay
fixed at 4 percent when the central bank meets on Thursday.
The dollar fell against major trading-partner currencies,
with the U.S. Dollar Index <.DXY> down 0.35 percent at 73.199.
Against the yen, the dollar <JPY=> fell 0.53 percent at
104.79.
U.S. crude <CLc1> jumped more than $4 to a high of
$120.36, and settled up $3.65 at $119.97. London Brent crude
<LCOc1> rose $3.43 to $117.99 in light trade due to a bank
holiday in Britain, after hitting $118.58 a barrel.
"People are piling back up on crude oil due to the weakness
of the dollar and production issues in Nigeria," said Phil
Flynn, analyst at Alaron Trading in Chicago.
In Nigeria, Royal Dutch Shell <RDSa.L> was forced to shut
more of its production after militants on Saturday attacked a
flowstation in the oil-rich Niger Delta.
U.S. gold futures ended nearly 2 percent higher in thin
volume following sharp losses last week. Record high crude oil
prices helped lift bullion back toward the $900 level.
The June contract <GCM8> in New York settled up $16.10, or
1.9 percent, at $874.10 an ounce. The London gold fix was not
available because of the bank holiday.
In Asia, Japan was on holiday, but in Hong Kong stocks fell
from the previous session's three-and-a-half-month high,
closing down 0.22 percent.
(Reporting by Matthew Robinson, Ellis Mnyandu, Chris Reese,
Steven C Johnson and Frank Tang in New York and Sitaraman
Shankar in London; Editing by Leslie Adler)
