Stock gains fade as Fed warns of market strains

NEW YORK (AP) ? Stock indexes swung from gains to losses and back again Tuesday afternoon, after the Federal Reserve cautioned that Europe’s financial crisis still poses a threat to the world’s economy.

The Dow Jones industrial average rose 7 points, or 0.1 percent, to 12,028 as of 3 p.m. Eastern time. It had risen as high as 126 points earlier Tuesday after two strong auctions of European debt reassured investors.

The Federal Reserve portrayed the U.S. economy as slightly healthier but cautioned that it remains vulnerable to the European debt crisis. “Strains in global financial markets continue to pose significant downside risks to the economic outlook,” the Fed said in a statement.

The Spanish government was able to sell short-term debt at much lower interest rates Tuesday compared with a month ago, a signal that markets are becoming less fearful about the government’s ability to repay its debt.

In its first sale of short-term bills, the European Financial Stability Fund raised 1.9 billion euros ($2.6 billion) from investors at an average rate of 0.22 percent. That’s below the rate Germany pays for the similar bills. “This is an amazing success,” Carl Weinberg, chief economist at High Frequency Economics, wrote in a note to clients.

The Dow sank 162 points Monday when Moody’s and Fitch warned that the fiscal agreement reached last week among European leaders fell far short of what was needed to contain that region’s debt crisis.

The Commerce Department reported Tuesday that retail sales rose for the sixth straight month in November. Sales increased just 0.2 percent, below what analysts had expected. But the government also revised the previous month’s slightly higher. That was the encouraging part, said Tim Hoyle, director of research at Haverford Investments. “It reassures you that the economy is going in the right direction,” Hoyle said.

Energy companies led the market higher as crude oil rose back above $100. Exxon Mobil Corp. rose 2 percent, Chevron Corp. 1.5 percent. Drugmaker Pfizer added 2.1 percent, the most of the 30 companies in the Dow. Pfizer said it plans to buy back up to $10 billion of its own stock.

The Standard & Poor’s 500 index dropped 2 points, or 0.2 percent, to 1,233. The Nasdaq composite fell 14 points, or 0.5 percent, to 2,598.

The Vix, a measure of stock market volatility, fell to 25. It has dropped 10 percent in December. The index remained above 30 from early August until last week. Hoyle said a sustained fall in the Vix usually is followed by a rise in stock prices. The recent trend “sets us up for a little Santa Claus rally between now and the end of the year.”

The yield on the 10-year Treasury note fell to 1.95 percent from 2.02 percent late Monday after an auction of new 10-year notes drew strong demand.

Urban Outfitters jumped 6 percent, the most in the S&P 500 index, after the retailer said its sales were rising faster than analysts were expecting. The Philadelphia-based company owns Urban Outfitters stores, Anthropologie and Free People.

Sprint Nextel Corp. rose 1 percent as it looked like its rival AT&T Inc. would be unable to pull off an acquisition of T-Mobile USA. Sprint agreed to drop a lawsuit against AT&T now that the deal appears to be in jeopardy. Sprint had been lobbying to stop it.

Electronics retailer Best Buy plunged 15 percent. The company said its third-quarter income sank 29 percent as it cut prices on tablets and TVs to drive sales and traffic during the busy holiday season.