U.S. stocks slip after 4-year high; euro soars on ECB

Tue Aug 21, 2012 5:17pm EDT
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By Wanfeng Zhou

NEW YORK (Reuters) - U.S. stocks fell on Tuesday as investors cashed in gains after driving the S&P 500 index to its highest in four years, but the euro rallied against the dollar on hopes the European Central Bank will soon start buying Spanish and Italian bonds to contain the debt crisis.

Spanish borrowing costs fell and Portuguese government bond yields slid to levels reached before Lisbon agreed to a bailout deal in May 2011, with traders citing media reports that the ECB was drawing up detailed plans about bond-buying.

The perception of declining risks from the euro crisis has been a major factor behind stocks' recent gains. Earlier in the session, the broad Standard & Poor's 500 Index .SPX climbed to its strongest intraday level since May 2008, before surrendering gains ahead of technical resistance.

"It's not uncommon that you run into some resistance at new highs," said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis. "Traders sort of play for a while to see which way the market is ultimately going to resolve itself."

Uncertainty remained high and investors were concerned that the ECB's requirement that troubled countries ask for help from the euro zone's rescue funds before turning to the central bank may mean that the Spanish crisis could get worse before it gets better. Still, optimism over eventual ECB action bolstered sentiment.

"The market has moved to the belief that (the ECB) is going to do whatever it takes," said William Larkin, fixed-income portfolio manager at Cabot Money Management in Salem, Massachusetts.

The Daily Telegraph, a British newspaper, supported a report over the weekend in a German magazine that the ECB planned to put a hard cap on Spanish and Italian bond yields.

An ECB spokeswoman, asked about the Telegraph story, referred to the ECB's statement on Monday, when it said it was misleading to report on policy decisions that had not been made.   Continued...

A man looks at an electronic board displaying share prices outside a brokerage in Tokyo July 25, 2012. REUTERS/Yuriko Nakao