NEW YORK (CNN/Money) -
Stocks closed lower Thursday following a day of heavy news and heavy trading, shaken by uncertainty surrounding the effects of China's currency revaluation, attacks on London's Underground and mixed earnings reports.
The Dow Jones industrial average (down 61.38 to 10,627.77, Charts) closed down about 0.6 percent while the broader Standard & Poor's 500 (down 8.16 to 1,227.04, Charts) fell about 0.7 percent. The Nasdaq composite (down 9.84 to 2,178.60, Charts) lost about 0.5 percent.
"The market was dealt a one-two punch," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.
Google (Research) and Microsoft (Research) reported a rise in profits after the bell and both beat estimates.
But Google shares plummeted and Microsoft slipped as well, which investors said may indicate the general direction of the market Friday.
Three attacks on London's Underground and one on a bus, which came two weeks to the day after attacks that left 56 people dead, were largely unsuccessful but nonetheless managed to rattle markets. But most of the day's speculation revolved around China's decision to revalue the yuan.
The China question
In a surprise move by China, just after 7 a.m. ET, the country annouced it pegged the yuan to a basket of currencies rather than just the U.S. dollar, which vaulted the yuan 2 percent higher against the dollar immediately following the news.
"It injects some uncertainty," said Hugh Johnson, chairman of Johnson, Illington Advisors, an asset management company. "The worry is the Chinese economy will slow too much, and that will send markets down worldwide."
But Johnson said the relatively small drop in U.S. stocks was evidence the markets think China is taking the appropriate steps to cool its red-hot economy and avoid an inflation-induced crash.
He also said it may benefit U.S. companies, which are expected to gain market share as their goods become cheaper for the Chinese and Chinese goods become more expensive for U.S. consumers, but the effects will be minimal and a while in coming due to the small nature of the revaluation.
"Let's not jump for joy; we're talking 2 percent," he said.
Jack Ablin of Harris Bank also said the boost in interest rates, which was caused by falling Treasury prices on fears China would decrease the amount of U.S. government debt it owns as it shifts it currency peg from the dollar to a basket of currencies, affected stocks.
Rising interest rates make it more expensive for companies to borrow money for capital improvements. Higher rates also make it more expensive for consumers, the driving force behind U.S. economic growth, to borrow money.
Treasury prices tumbled on the yuan news, with the yield on the 10-year note climbing to 4.27 percent from 4.16 percent late Wednesday. Bond prices and yields move in opposite directions.
Also spooking the Treasury market were comments from Fed Chairman Alan Greenspan, who told members of Congress the Fed may continue with its pace of interest rate hikes even if long-term bond yields fall below short-term ones, a process known as inversion that has preceded recessions in the past.
Greenspan said it's less likely that an inverted bond curve would lead to a recession this time around.
China's revaluation also hit the dollar, which fell slightly against the euro but sharply against the yen, as the yen is expected to gain along with other Asian currencies as the yuan rises.
But some positive economic news lent stocks support.
The Conference Board said its basket of leading economic indicators rose 0.9 percent in June, higher than analysts had expected. The board also revised numbers for the two previous months upward.
And the number of people filing unemployment claims fell by 34,000 last week to 303,000, a drop far larger than Wall Street expected. It was the largest one-week decline since December 2002.
Market breadth was negative in active trade. Losers beat winners by a margin of over two to one on the New York Stock Exchange, where 1.66 billion shares traded. On the Nasdaq, decliners topped advancers three to two on volume of 2.09 billion shares.
Earnings reported from Wednesday's close to Thursday's close were mixed.
eBay (up $7.23 to $42.10, Research) handily beat earnings and revenue expectations, with sales soaring 40 percent from a year earlier.
Coca-Cola (up $0.62 to $43.95, Research) said second-quarter net profit rose 9 percent, beating Wall Street forecasts, and that it will buy back at least $2 billion in shares during 2005.
And Qualcomm (up $2.92 to $39.01, Research), the wireless technology company, said quarterly earnings and revenue rose on Japanese demand for high-end cell phones. It also raised its full-year forecast.
But Nokia (down $2.08 to $15.78, Research), the world's top cell-phone maker, said its quarterly results missed forecasts due to fierce price competition.
Merck (down $0.47 to $31.38, Research) reported a drop in second-quarter profit, hurt by a tax charge and the withdrawal of its popular arthritis drug, Vioxx.
Caterpillar (Research) reported a big jump in second-quarter profits and raised its full-year outlook, but shares fell after a run-up before the results were released.
Drugmaker Eli Lilly (down $1.01 to $56.25, Research) reported a second quarter loss, hurt by lawsuits and settlements related to its schizophrenia drug Zyprexa. Excluding the charges, Eli met Wall Street estimates.
U.S. light crude oil for September delivery fell 89 cents to settle at $57.13 a barrel on the New York Mercantile Exchange. The September contract began trading as the front-month contract Thursday.
COMEX gold rose $3.60 to $425.70 an ounce.
In global trade, Asian-Pacific stocks ended higher and European stocks closed mixed.