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msnbc.com
updated 5/11/2004 9:34:44 AM ET 2004-05-11T13:34:44

Persistent fears that the U.S. Federal Reserve will raise interest rates as soon as June dragged Wall Street's major stock indices to their lowest levels of the year Monday and pushed stock indices lower around the globe.

Major Market Indices

U.S. investors took their cue earlier in the day from steep losses on overseas markets. Japanese stocks closed Monday down nearly 5 percent, while European shares dropped to six-week lows. Wall Street saw its third straight day of heavy selling.

“We’re seeing an emotional market now,” Peter Cardillo, S.W. Bach’s chief strategist, said. “The market is pricing in not one rate hike, but several rate hikes this year. But I think the market is becoming oversold on a technical basis, so the fear of higher interest rates is probably exaggerated and we’re probably getting to the end of this decline.”

Analysts said equity traders worldwide were anxious about Friday’s better-than-expected employment report from the Labor Department, which showed the U.S. gained 288,000 new jobs in April, far greater than the 170,000 predicted by a consensus of economists.

The fear is that a strengthening U.S. economy, and the possibility of rising inflation, may prompt the Federal Reserve to raise its key interest rate from a four-decade low as early as next month as the economy accelerates. The Fed signaled it is preparing to raise rates later this year at a policy meeting last week, but said it would do so at a “measured” pace.

James Luke, director of growth equities at BB&T Asset Management in Raleigh, N.C., said there is some concern on Wall Street that the Fed may have to raise rates sooner than expected to head off inflation.

“We’ve had energy prices stay at high levels for relatively long, and had a recent jump at the retail level,” Luke said. “That takes directly out of discretionary income, and perhaps you’ll start seeing some significant slowdown in consumer spending.” Consumer spending represents about two-thirds of all economic activity.

The Dow Jones industrial average, which fell as much as 183 points in the morning session, closed Monday down 127.32 points, or 1.3 percent, and below the psychologically-important 10,000 level for the first time since Dec. 12. Trading volume on the New York Stock Exchange was heavy.

Broader indices also slid. The Standard & Poor’s 500-stock index closed the day off 11.58 points, or 1.1 percent, while the Nasdaq composite index, full of technology stocks, dropped 21.89 points, or 1.1 percent, finishing below 1,900 for the first time since Nov. 21.

Wall Street has been gripped by a spasm of selling for four weeks, as economic indicators have grown more positive and investors have worried that corporate profits would be eroded by an ensuing series of interest rate hikes. Along the way, the market completely ignored a stellar batch of first-quarter earnings reports.

Increasing instability in Iraq, and turmoil surrounding the maltreatment of Iraqi prisoners, has also weighed on Wall Street. U.S. forces stepped up their offensive against radical cleric Muqtada al-Sadr over the weekend, destroying one of his offices in Baghdad and killing as many as 35 members of his militia, according to the U.S. military.

“Investors do have some incentive to lock in gains,” said Stuart Freeman, chief equity strategist at A.G. Edwards. “Stocks have done very, very well over the past 12 months, and this could be as good as it gets for the next few months. And you’re seeing a lot of rotation into traditionally defensive sectors such as healthcare and consumer staples.”

Lower crude oil prices weighed on the shares of big oil companies like Exxon Mobil and Sunoco after Saudi Arabia called for an OPEC output increase. Oil prices eased off the $40 mark hit last week, a price last seen in 1990. Dow component Exxon's share price fell 2.8 percent to $42.05.

Dow component Citigroup on Monday said it would pay $2.65 billion to settle a class-action suit brought by holders of WorldCom stocks and bonds who claimed it had participated in the massive fraud with the phone company, now known as MCI. Citigroup share price fell 2.8 percent to $45.41.

Cable television operator Charter Communications Inc. on Monday posted a wider first-quarter loss as it absorbed losses previously attributed to minority interest, although revenue rose on subscriber growth at its high-speed Internet service. Charter’s stock price fell 6.5 percent to $3.61.

SunTrust Banks’ nearly $7 billion deal for National Commerce Financial Corp. renewed fresh merger action in the banking sector. SunTrust’s share price was down 7.6 percent at $61.80 on the New York Stock Exchange, while National Commerce saw its shares fall 2.2 percent to $31.10 on the Big Board.

A number of industry bellwethers, including Dell, Wal-Mart Stores and Cisco Systems, are expected to release earnings later this week. But while quarterly earnings reports have generally been strong, investors have looked past the reports to focus on potential rate hikes.

Wall Street will also be watching closely when the April producer price index, which measures wholesale prices, and the April consumer price index, which measures prices paid by consumers, are released later this week. The two inflation gauges are likely to have an influence on whether the Fed will decide to raise rates at its June meeting, or wait until later in the year.

Overseas, Japan’s benchmark Nikkei stock average plunged 4.8 percent Monday, posting its biggest percentage drop since the Sept. 11, 2001 attacks. In Europe, Britain’s FTSE 100 index dropped 2.3 percent, Germany’s DAX index was down 2.9 percent and France’s CAC-40 index finished the day down 2.7 percent.

Reuters and the AP contributed to this report.

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