KEY POINTS:
NEW YORK - More signs of weakness in the mortgage market, another surge in oil prices and a Federal Reserve rate decision could create more turbulence for Wall Street this week.
Widening fallout from the US housing slump has rattled credit markets, putting investors on edge about the outlook for corporate takeovers and share buybacks - two catalysts of the market's recent rally to record highs.
On Friday (US time), Standard & Poor's cut its ratings outlook on the debt of investment bank Bear Stearns, fanning concern that troubles in the sub-prime mortgage market are spreading, which could threaten the economy's health.
The ratings agency's move came as American Home Mortgage Investment, a sub-prime mortgage lender, announced plans to close most of its operations, joining a growing list of casualties hit by the stalled housing market.
"The market is really struggling with defining the size of the sub-prime problem," said Jim Fehrenbach of Piper Jaffray.
Investors will tune in to what the Federal Reserve says in its assessment of the economy's outlook when it releases its policy decision on interest rates on Tuesday.
The Federal Open Market Committee is widely expected to keep rates unchanged, so investors will be focused on the central bank's assessment of risk, especially regarding troubles in the sub-prime market. The Fed has held the fed funds rate for overnight bank loans steady at 5.25 per cent since June 2006.
On Friday, an escalation of credit worries sparked a sharp sell-off in stocks. By the closing bell, the Standard & Poor's 500 index and the Nasdaq had suffered their worst one-day percentage losses since February 27.
The S&P's index slid 2.66 per cent,the Nasdaq was down 2.51 per cent and the Dow Jones fell 2.09 per cent.
- Reuters
