NEW YORK – Stocks fell Thursday as investors stepped back and digested the possibility of new terrorist attacks in London along with the impact of China's decision to revalue its currency.
The Dow Jones industrial average (search) fell 61.38 points, or 0.57 percent, to end at 10,627.77. The Standard & Poor's 500 Index (search) shed 8.18 points, or 0.66 percent, to finish at 1,227.04. The technology-laced Nasdaq Composite Index (search) slipped 9.97 points, or 0.46 percent, to close at 2,178.60.
"I think the London incident gave investors an excuse to take some money off the table after reaching new highs yesterday," said Peter Cardillo, chief strategist and senior vice president at S.W. Bach & Co. "Otherwise, the news was outstanding. The China revaluation is great news, and a step in the right direction. Earnings are coming in better than expected. Oil is down. But London gave the markets some jitters, certainly."
Before the opening of U.S. trading, the central bank of China said it was revaluating its currency by 2 percent, linking the yuan's value to a basket of currencies, rather than directly at 8.28 to the dollar as it has for a decade. The move initially values the yuan at 8.11 to the dollar and comes in the midst of a political firestorm in the United States over China's trade policies.
The yuan revaluation may have "good long-term ramifications, such as better trade opportunities for U.S. companies," said John Augustine, chief investment strategist at Cincinnati-based Fifth Third Asset Management. "Look at the industrial sector first."
A Sanford Bernstein & Co. analyst noted most major U.S. retailers have diversified sourcing networks and could shift production out of China if prices surge.
Shares of major U.S. retailers, including Wal-Mart Stores Inc. (WMT), the world's largest retailer, and No. 1 home improvement retailer Home Depot Inc. (HD) declined. Both are Dow components. Wal-Mart shares slipped 1.2 percent, or 61 cents, to $49.39 and Home Depot's stock dropped 1.4 percent, or 60 cents, to $43.35 on the New York Stock Exchange.
Federal Reserve Chairman Alan Greenspan (search) hailed China's move as a good first step, and reiterated his bullish outlook on the economy in a second day of congressional testimony. His forecast was backed by the latest reading of the Conference Board's index of leading economic indicators, which rose 0.9 percent in June, the largest increase since December 2003.
The London blasts are "probably the reason the market netted down because the rest of the news has been pretty positive," said Lincoln Anderson, chief investment officer at LPL Financial Services in Boston. "A concern that's out there is two in a row and people start to connect the dots. Maybe that means we'll have three, four or five. It's certainly not a one-off."
After the closing bell, shares of Microsoft Corp. (MSFT) fell 2 percent to $25.88 after the world's largest software producer gave a revenue forecast that fell short of Wall Street analysts' estimates. And the stock of Google Inc. (GOOG) fell 9.5 percent to $284.05 after the Web search leader reported revenue that was not as strong as some had hoped.
Oil prices fell as fears of hurricane damage in the Gulf of Mexico eased, with a barrel of light crude at $57.13, down 89 cents, on the New York Mercantile Exchange (search).
"We have seen at least a small break in oil prices," Anderson said. "That's been a positive, even if it shows up and knocks down stock prices because it takes down Exxon and components of the energy sector. But if it sticks, it should be positive for stocks overall."
The dollar fell against most major currencies in the wake of China's decision, which traders felt would benefit Asian and European currencies over the dollar. Gold prices rose.
The Labor Department (search) reported that first-time jobless claims fell sharply, down 34,000 to 303,000 last week. Investors welcomed the report as a sign of continued economic growth.
Earnings from major corporations were mostly positive. The technology sector got a boost as eBay Inc.(EBAY), the online auctioneer, posted a 53 percent increase in second-quarter earnings and trounced Wall Street profit expectations by 4 cents per share. EBay, whose stock was pummeled after a first-quarter earnings disappointment, soared 20 percent, or $7.23, to $42.10.
Coca-Cola Co. (KO) rose 62 cents to $43.95 after it saw a 9 percent jump in quarterly profits and beat analysts' forecasts by 4 cents per share after one-time items. A mediocre domestic sales performance was outweighed by strong international sales for the Dow industrial.
Fellow Dow component McDonald's Corp. (MCD) had solid, if somewhat lackluster, earnings that came in above Wall Street's expectations. New menu items helped overcome a tax hit from repatriating international income. McDonald's fell 12 cents to $30.78.
Shares of Exxon Mobil Corp. (XOM), a Dow component, fell 1.9 percent, or $1.11, to $57.89, while the stock of rival Chevron Corp. slid 1.1 percent, or 63 cents, to $56.97, both on the NYSE. Exxon Mobil also was among the biggest drags on the S&P 500, while Chevron added to the pressure.
Heavy-equipment maker Caterpillar Inc. (CAT), a Dow component, posted better-than-expected earnings. But its shares slid 1.7 percent, or 90 cents, to $52.30.
Merck & Co. (MRK) fell 1.5 percent, or 47 cents as it reported a 59 percent drop in profits. Like McDonald's, the drugmaker's bottom line was hurt by repatriating $15 billion in overseas profits. However, a lack of sales from the painkiller Vioxx— Merck's best-selling drug before it was pulled off the shelves due to severe health risks — also hurt the company.
Trading was heavy on the NYSE, with about 1.66 billion shares changing hands, above last year's daily average of 1.46 billion, while on Nasdaq, about 2.09 billion shares traded, higher than last year's daily average of 1.81 billion.
Declining stocks outnumbered advancing ones by a ratio of about 2 to 1 on both the NYSE and Nasdaq.
The Russell 2000 index of smaller companies fell 10.46, or 1.54 percent, to 667.10.
Overseas, Japan's Nikkei stock average fell 0.02 percent. In Europe, Britain's FTSE 100 closed up 0.12 percent, France's CAC-40 rose 0.16 percent for the session, and Germany's DAX index surged 0.95 percent in late trading.
Reuters and the Associated Press contributed to this report.