Spiralling oil prices hit US stocks

Oil prices that soared to US$65 (€52.48) a barrel choked off an early rally on Wall Street today, pummelling the market's optimism about the economy in the process.

The tech-focused Nasdaq composite index also was hit by a disappointing forecast from networking gear maker Cisco Systems.

Analysts said investors had begun the day confident that the US economy will stay strong, absorbing both higher short-term interest rates and rising gasoline prices. But the erosion of stocks' early advance - the Dow Jones industrials had gained more than 100 points, extending a rally from Tuesday - was proof that many investors remained uneasy and inclined to sell when oil climbs higher.

Crude climbed hit an intraday record of US$65 (€52.48) a barrel on the New York Mercantile Exchange before easing to a record close of US$64.90 (€64.90), up US$1.83 (€1.48) for the day.

The price of oil "clearly is the headline, and that's probably causing the market malaise", said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

The Dow fell 21.26, or 0.2%, to 10,594.41.

Broader stock indicators also fell, having given up earlier gains. The Standard & Poor's 500 index fell 2.25, or 0.18%, to 1,229.13 and the Nasdaq composite index dropped 16.38, or 0.75%, to 2,157.81.

The market initially was buoyed by confidence that the Federal Reserve's decision on Tuesday to raise short-term interest rates one-quarter percentage point to 3.5% would not harm the economy. The Fed also stated that its interest rate policy is "accommodative" and future rate hikes can continue at "a pace that is likely to be measured", suggesting that the economy should continue expanding.

But investors turned around when oil prices resumed their climb despite new estimates from the US Department of Energy of slower growth in world oil demand, which would put less upward pressure on prices.

Investors, already uncomfortable with a series of refinery outages, apparently focused on the department's supply report, which showed a 2.1 million barrel decrease in the nation's supply of gasoline. They repeated a pattern from recent months, setting aside evidence of a strong economy to focus instead on oil's rising price.

Mark Vitner, senior economist at Wachovia Securities in Charlotte, North Carolina, noted that "it's somewhat surprising how resilient the economy has been, despite higher energy prices."

The concern on Wall Street, however, is that "eventually, higher gas prices will eat away at consumers' purchasing power ... and slow economic growth," Vitner said.

American International Group, the insurer rocked by state and federal accounting investigations, rose 82 cents, or 1.3%, to 62.24 after the New York-based firm reported strong second-quarter earnings above Wall Street expectations.

Federated Department Stores, owner of such nameplates as Bloomingdale's and Macy's, said its earnings nearly doubled in the second quarter, and the company sees sales growth picking up in the second half of the year. Federated advanced 93 cents, or 1.3%, to 73.69.

But Cisco fell 1.36, or nearly 7%, to 18.25 after the firm posted a higher fourth-quarter profit but said sales in its first fiscal quarter were likely to increase 105, less than analysts were expecting.

Other tech stocks turned lower, too, with Microsoft dropping 40 cents, or 1.5%, to 26.95 and IBM dipping 1.48, or nearly 2%, to 82.02.

The Walt Disney Co. dropped 67 cents, or 2.5%, to 25.47 when third-quarter results showed a rise in profits but revenue came in below expectations.

The Russell 2000 index of smaller companies was down 0.32, or 0.05%, at 666.30.