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Rising rates, oil jitters may keep investors on sidelines

By Meg Richards
The Associated Press

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NEW YORK — June will be a long month for investors who are cranky about rising interest rates and skyrocketing oil prices.

A pair of watershed events scheduled for the last two days of the month — a Federal Reserve meeting on interest rates and the formal handover of power in Iraq — are likely to keep Wall Street in a holding pattern for another three weeks.

Already facing a backdrop of indecision, few investors will want to make big moves ahead of such major catalysts. The waiting game could create some choppiness, said Arthur Hogan, chief market analyst at Jefferies.

"When more people are on the sidelines, it tends to exaggerate market moves," Hogan said. "When you have fewer players and lower volume, you tend to have more volatility."

The month may shape up much as this past holiday-shortened week did, Hogan said. Trading was thin as investors waited for a midquarter update from Intel and the Labor Department's report for May. When all was said and done, the major indexes posted only modest changes.

"In general, the economic background looks really quite favorable — good strong growth with still-benign inflation," said Lynn Reaser, senior market strategist with Banc of America Capital Management. "That's how we're starting the month. We'll see if that bears out."

There will be some important economic numbers between now and the end of the month, when the Fed is expected to start raising short-term interest rates off their current historic lows. Some data points will take on greater importance for investors ahead of the policy-making group's June 29-30 meeting, such as the Consumer Price Index — the government's main measure of inflation — and retail sales.

World events, especially in the Mideast, will also have heightened significance for the financial markets. Despite the Organization of Petroleum Exporting Countries' decision to raise its output limit by 2.5 million barrels a day this summer, fuel prices remain a grave concern.

"OPEC has suggested they're going to produce as much as possible, but the wild card remains any kind of terrorist threat to the oil-producing region," Reaser said.
 
The possibility that something could happen to disrupt the transition of power in Iraq, set for June 30, is certain to keep investors on edge, Reaser and other analysts said. Some see investors' preference for bonds and traditionally defensive stocks as a sign that the markets are pricing in a poor handover and continued turmoil.

"The whole Iraqi situation so depicts the difference between uncertainty and risk," said Don Ross, president of National City Investment Management. "Risk at least you can quantify. But who knows what's going to happen over there?"

Despite all the uncertainty, there's some cause for cheer. Wall Street's positive reaction to yesterday's better-than-expected jobs number shows the market has finally factored in the expected rate hike, which most believe will come in at a modest 0.25 percent.

It was a sharp contrast to the sell-offs that followed similarly bullish employment reports in March and April, when investors worried about what impact the data would have on Fed policy. The change in attitude is important, analysts said.

"We've entered the realm where good news is good news," said Joseph Keating, chief investment officer at AmSouth Asset Management. "I think the market could continue to do well over the summer, assuming we get through the Iraq handoff."

Week's market activity

The Dow ended the week up 54.37, or 0.5 percent, finishing at 10,242.82, after gaining 46.91 yesterday.

Microsoft, one of the 30 Dow stocks, ended the week down 28 cents, or 1.1 percent, at $25.95 a share, after yesterday's gain of 6 cents.

Boeing, also a Dow stock, was up $1.10, or 2.4 percent, for the week to $46.90, after gaining 80 cents yesterday.

The Nasdaq composite index sank 8.12, or 0.4 percent, during the week, closing yesterday at 1,978.62, following yesterday's gain of 18.36. The Standard & Poor's 500 index gained 1.82, or 0.2 percent, to close at 1,122.50, after adding 5.86 yesterday.

Gold/oil

For the week, gold was off $2.30, or 0.6 percent, to $391.70 an ounce, after gaining $2.80 yesterday in U.S. trading.

Oil fell $1.39, or 3.5 percent, for the week to $38.49, after slipping 79 cents yesterday.