Stocks Fall as Fed Looms

Traders step away from big bets ahead of Tuesday's critical central bank meeting on rates.
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Updated from 4:17 p.m. EDT

Stocks were sluggish to start the week as the fallout from the credit crisis continued to hit a mortgage lender overseas, hurting sentiment a day before an interest rate decision from the

Federal Reserve

.

The

Dow Jones Industrial Average

fell 39.10 points, or 0.29%, at 13,403.42. The

S&P 500

was off 7.60 points, or 0.51%, at 1476.65. The

Nasdaq Composite

fared the worst, dropping 20.52 points, or 0.79%, to 2581.66.

British lender

Northern Rock

pressured European bourses, and by extension the U.S., falling 40% on word that its customers withdrew roughly $4 billion from its branches.

On Friday, Northern Rock dropped more than 20% after the company sought emergency funding from the Bank of England. The company also warned that 2007 earnings will come in below current estimates and that profits in 2008 would also be soft.

London's FTSE 100 ended down 1.7%, and the CAC 40 in Paris was off 1.8%. In Asia, China's Shanghai Composite rose 2.1%, while Hong Kong's Hang Seng declined 1.2%. Japan's Nikkei 225 was closed for a holiday.

While most expect the Fed to cut the fed funds rate by 25 basis points when the Federal Open Market Committee convenes on Tuesday, traders were disturbed by comments out of former Fed Chairman Alan Greenspan during a televised interview with CBS over the weekend.

Greenspan said in the interview, broadcast Sunday night on

60 Minutes

, that the forecast for the U.S. economy is "pretty gloomy" and that "the re-emergence of inflation" is the worst problem facing the Fed.

"The Fed is locked in for a 25-basis-point cut, according to the bond market. However, that hasn't stopped Alan Greenspan from making comments on inflation," said Marc Pado, U.S. market strategist with Cantor Fitzgerald. "We should expect the trading to be rather cautious until the FOMC comments are released."

Indeed, breadth was negative and volume was meager to start the week. On the

New York Stock Exchange

2.38 billion shares changed hands Monday, as decliners topped advancers by a 2-to-1 margin. Volume on the Nasdaq reached 1.41 billion shares, with losers outpacing nearly 2 to 1.

"News out of the U.K. and Greenspan comments set a negative tone for the day, keeping investors cautious," said Michael Sheldon, chief market strategist with Spencer Clarke LLC . "It was a generally narrow trading range."

Nearly all of the market's subsector indices were lower Monday. Among the worst decliners, the Nasdaq Biotech Index declined 1.5%, the Dow Jones Transportation Average fell 1%, and the Philadelphia Semiconductor Sector Index shed 0.6%

Among equities,

Microsoft

(MSFT) - Get Report

fell after a European court dismissed an appeal of an antitrust ruling and ordered the tech giant to pay a nearly $700 million fine. Microsoft shed 31 cents, or 1.1%, to $28.72.

General Motors

(GM) - Get Report

was in the spotlight as negotiations continued between the automaker and the United Auto Workers union over a new labor agreement.

The UAW has threatened to have workers strike, and the old contract has now expired, but the union has extended the deadline each hour that negotiations have gone on. Shares of GM climbed $1.01, or 3%, to $35.23.

A number of deals were being struck, though all were small or midsized. Among them,

Deutsche Telekom's

(DT) - Get Report

T-Mobile unit is planning to buy the cell-phone company

SunCom Wireless

(TPC) - Get Report

for about $1.6 billion, and

Paetec Holding

(PAET)

will acquire McLeodUSA for $492 million.

On the economic front, the New York Fed said its Empire State index dropped to a reading of 14.7 from 25.1, below economists' consensus of 18.0. It was the lowest reading for the index since May's 8.0.

U.S. Treasury bonds were little changed. The 10-year note was down 3/32 in price, yielding 4.47%. The 30-year bond rose 3/32, yielding 4.72%.

Crude oil set another intraday record. The October front-month crude oil contract jumped $1.47 to close at $80.57 a barrel. Gold and silver futures were also advancing.

As for analyst moves, Bear Stearns upgraded

Ford

(F) - Get Report

to outperform from peer perform, citing the automaker's strong cash flow. JPMorgan lifted

Advanced Micro Devices

(AMD) - Get Report

to neutral from underweight on the expected strong performance of the company's new Barcelona server chip.

Ford advanced 3.1% to $8.28, and AMD tacked on 1.2% to $12.84.

After the closing bell,

Adobe Systems

(ADBE) - Get Report

is posted an adjusted third-quarter profit of 45 cents a share, topping analysts' 40-cent forecast, according to Thomson First Call.

Tuesday marks the start of a string of key earnings reports from investment banks this week, with

Lehman Brothers

(LEH)

kicking things off.

Best Buy

(BBY) - Get Report

and

AutoZone

(AZN) - Get Report

are also due to report.