Stocks cut gains in volatile session as oil falls

By Ryan Vlastelica

NEW YORK (Reuters) – Stock markets around the world edged higher on Tuesday on investor hopes for economic stimulus from the European Central Bank, though Wall Street turned negative as crude oil continued to fall.

Oil hit a near six-year low as the United Arab Emirates defended OPEC’s decision not to cut output and traders wondered when a six-month-long price rout might end. Brent crude sank 3.1 percent and U.S. crude lost 1.4 percent, extending Monday’s 4.7 percent drop.

If oil closes down on the week, it would mark its eighth straight weekly drop. Energy shares <.SPNY> fell 1.3 percent in the United States, the main driver for Wall Street cutting its gains. The recent weakness in the commodity has been a major contributor to both volatility and weakness in stocks. The S&P 500 is coming off a two-week decline and turned negative on Tuesday after rising as much as 1.4 percent.

The volatility “makes it hard to read too much into today’s move and evaluate if it is sustainable,” said Michael O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.

Policymakers fear cheap oil due to a supply glut could put key economies into a deflationary tailspin, raising expectations that the ECB could launch a large-scale program of government bond-buying soon, possibly at its Jan. 22 policy meeting.

“It’s no secret that Europe is slowing down and that more stimulus is necessary,” O’Rourke said. “I’d say the odds of our getting more are very good, above 90 percent, but there’s still a lot of uncertainty about what form it will take, and whether the ECB will be able to act in January.”

The pan-European FTSEurofirst 300 index <.FTEU3> ended 1.4 percent higher after opening lower but the MSCI International ACWI Price Index <.MIWD00000PUS> was up less than 0.1 percent, paring gains seen earlier in the global trading day.

The Dow Jones industrial average <.DJI> fell 57.99 points, or 0.33 percent, to 17,582.85, the S&P 500 <.SPX> lost 10.5 points, or 0.52 percent, to 2,017.76 and the Nasdaq Composite <.IXIC> dropped 13.78 points, or 0.3 percent, to 4,650.92.

Alcoa Inc late Monday reported fourth-quarter earnings that beat expectations, though shares fell 1.9 percent on Tuesday to $ 15.90. The aluminum maker is no longer a Dow component but as one of the first major names to report it is seen as informally setting the tone for the earnings season.

The U.S. dollar index <.DXY> rose 0.3 percent against a basket of currencies, and gained 0.5 percent against the euro at $ 1.1773. It rose 0.4 percent against the yen.

Euro zone government bond yields fell on the prospect of looser ECB policy and many euro zone countries sold debt to lock in ultra-low borrowing costs.

The benchmark 10-year U.S. Treasury note traded down 1/32 in price to yield 1.9138 percent.

Copper prices sank 3.9 percent, on track for their fifth straight daily decline and their biggest one-day drop since November despite strong trade data from China and signs of physical demand.

Gold rose 0.2 percent while silver added 3.4 percent.

(Editing by James Dalgleish)