NEW YORK Wall Street stock prices retreated from five-year highs on Monday, while the euro rose against the dollar on bets the European Central Bank might refrain from signaling more interest rate cuts on Thursday.
The weakness in the equities market, partly due to caution ahead of companies beginning to report on their fourth-quarter earnings, spurred selling of oil, gold and other risky investments. This stoked some safety bids for U.S. and German government debt.
Investors turned their focus to corporate profits in the last three months of 2012, when growth in American holiday spending and corporate investments was tepid as shoppers and companies dialled back on worries about the United States going over the "fiscal cliff" - a series of automatic tax hikes and government spending cuts that could have kicked in if a budget deal in Washington were not reached last week.
"There is little doubt that concerns about the fiscal cliff created spending hesitancy in both consumers and businesses in the fourth quarter, and it is likely that will adversely impact earnings season," said Randy Frederick, managing director of active trading and derivatives at Charles Schwab in Austin, Texas.
Earnings are expected to be only slightly better than the third-quarter's lacklustre results and analysts' current estimates are down sharply from what they were in October.
"I think it's going to be a disappointing one this time around," Peter Cardillo, chief market economist at Rockwell Global Capital in New York, said of the upcoming earnings season that unofficially launches with aluminium maker Alcoa reporting its results after Tuesday's market close.
Uneasiness about corporate profits emerged even after data on Friday showed U.S. employers kept up a modest pace of hiring in December and the vast services sector expanded.
Hopes for global economic recovery got a boost after the Basel Committee of banking supervisors agreed to give banks four more years and greater flexibility than previously envisaged to build protective cash buffers. That means they can use more of their reserves to lend and help economies grow.
In the United States, news of a longer timetable for banks to manage their capital was overshadowed by 10 banks agreeing to pay $8.5 billion to settle a federal review of their questionable foreclosure practices.
The Dow Jones industrial average closed down 50.92 points, or 0.38 percent, at 13,384.29. The Standard & Poor's 500 Index finished 4.58 points, or 0.31 percent, lower at 1,461.89. The Nasdaq Composite Index ended down 2.84 points, or 0.09 percent, at 3,098.81.
Among the day's biggest movers were Nationstar Mortgage Holdings, whose shares jumped 16.9 percent to $38.83 after Bank of America entered a deal to sell the servicing rights on over $300 billion of home loans to Nationstar and Walter Investment Management.
Walter stock climbed 8.2 percent at $47.68.
After touching a 22-month peak last week, the FTSE Eurofirst index of top European shares ended 0.49 percent lower at 1,161.57, although the region's bank sector as measured by the STOXX euro zone bank index bucked the market trend, gaining 1.5 percent on the Basel news on bank capital.
MSCI's broad world equity index was down 0.2 percent at 347.01, but was still not far below an 18-month peak scaled when investors returned to the market after the immediate U.S. fiscal crisis was averted last week.
EURO GAINS BEFORE ECB MEETING
In the currency market, the euro was up 0.31 percent in late trading at $1.3115, erasing early losses. It held above a three-week low of $1.2998 hit on Friday.
Analysts predicted the single currency would stay around those levels until after the ECB meeting. Some expected the ECB to point to the prospect of lower rates early this year from the current 0.75 percent, contrasting with signals from Federal Reserve policymakers that the U.S. central bank may pursue less-accommodative policies in the future.
The Bank of Japan is also expected to take major steps to stimulate that country's economy later this month as the new government aims to end deflation and recession.
The greenback weakened against the yen, last down 0.49 percent at 87.73 yen. On Friday, the dollar climbed to a 2-1/2- year high of 88.12 yen based on Reuters data, which some traders reckoned was overdone.
Expectations of less-easy monetary policy from the Fed later this year mitigated the renewed safe-haven bids for U.S. government debt. The yield on benchmark Treasury 10-year notes was 1.90 percent, little changed from Friday when it ticked up to an eight-month high near 2 percent.
German Bund futures ended up 34 basis points at 143.09, rebounding after hitting one-month lows last week.
The weakness in stocks dragged oil prices lower, but signs of improvement in the global economy rekindled bids for crude futures, erasing their losses in late trading.
Gold prices fell again and stuck near their session lows.
Brent crude futures finished up 9 cents or 0.08 percent at $111.40 per barrel after rising 0.6 percent last week, while U.S. oil futures settled up 10 cents or 0.11 percent higher at $93.19.
Spot gold was down 0.56 percent at $1,646.96 an ounce, though above Friday's $1,625.79, its lowest price since August.
(Additional reporting by Rodrigo Campos and Angela Moon in New York; Richard Hubbard, Blaise Robinson, Anooja Debnath and David Brough in London; Editing by Dan Grebler and Chizu Nomiyama)