Dow sinks as oil prices slump

US stocks plunged today as a broker’s downgrade of Dell and higher oil prices aggravated Wall Street’s worries about a shaky start to second-quarter earnings. The Dow Jones industrial average sank more than 121 points.

An analyst’s reduced outlook for Dell drove concerns about the impact of a slowing US economy on tech companies, whose shares led the broader market lower and gave the Nasdaq composite index its biggest one-day drop in a month. Meanwhile, rising oil prices intensified the market’s inflation jitters.

“We’re not out of the inflation woods yet,” said Sam Stovall, chief investment strategist with Standard & Poor’s US equity research.

The US Energy Department reported that oil inventories dropped by a larger-than-expected amount last week. The news sent crude oil futures up 79 cents a barrel to settle at $74.95 (€59.01) on the New York Mercantile Exchange.

The Dow tumbled 121.59, or 1.09%, to close at 11,013.18.

Broader stock indicators also dropped sharply. The S&P 500 index fell 13.92, or 1.09%, to 1,258.60, and the Nasdaq fell 38.62, or 1.81%, to 2,090.24.

Decliners led advancers by more than 2 to 1 on the New York Stock Exchange.

Bonds stayed flat, with the yield on the 10-year Treasury note unchanged at 5.11% from Tuesday.

However, a recent bond rally showed many investors were attracted by rising returns as well as the perception that they are less risky than stocks.

Elsewhere, the US dollar was higher against the Japanese yen and barely changed versus European currencies. Gold prices rose to more than 650 dollars an ounce.

After months of intensive focus on the Federal Reserve’s interest rate policy, traders have reached a consensus that the central bank will raise rates again when it meets in August.

“We’ve been totally driven by what the Fed’s going to do, but it looks like we’ve lost that leader,” said Scott Merritt, a US equity strategist for JPMorgan Asset Management. “Now it’s almost a foregone conclusion that the Fed is done after August and people are trying to find something else to focus on.”

The result, he said, is a focus on the “data du jour” – anything from oil prices to inflation data – which can send stocks swinging wildly. Moreover, investors are highly sensitive to any signs that higher interest rates and inflation are hurting profits.

The market is in a “decision box”, said Rod Smyth, chief investment strategist, Wachovia Securities.

If the US economy continues to slow enough to persuade the Fed to pause, stocks should break out to the upside. But if inflation remains stubbornly high, the Fed may have to continue raising interest rates, even at the risk of a recession. That would send stocks sharply lower.

Microsoft sagged 46 cents to 22.64 after the EU fined the software company 357 million for failing to obey its 2004 antitrust order to share programme code with rivals, and threatened new penalties of 3.82 million a day from July 31. Microsoft said it would appeal, claiming the hefty fine was unfair.

Dell added to the tech sector’s burdens after UBS Investment Bank cut the computer maker’s second-quarter earnings and revenue forecast, citing evidence of a further slowdown in sales. Dell lost 1.04 to 22.38.

Genentech fell 3.08, or 3.7%, to 80.98 after two investment firms downgraded the stock on disappointing second-quarter sales of its Avastin cancer drug.

Gannett fell 1.29 to 55.62 after the company, the largest newspaper publisher in the US, reported an 8.3% decline in second-quarter earnings on softness at papers in Britain, as well as higher costs for newsprint and interest payments.

Volume on the New York Stock Exchange was 1.49bn, down from 1.58bn on Tuesday.

The Russell 2000 index of smaller companies plunged 13.22, or 1.85%, to 701.17.