Markets are caught up in the push pull of worry about Europe's debt crisis and sluggish U.S. growth.
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Stocks Monday rallied out of the gate, with the Dow soaring more than 200 points before it fizzled and finished up just 37 points at 10,854. The S&P 500 gained less than a point, finishing at 1123. The Nasdaq closed 3 points higher at 2345. Financials were the worst performers, down 1.3 percent.
Bank of America skidded nearly 8 percent on concerns it needs to raise capital. Goldman Sachs shares were down 4.7 percent after a report that CEO Lloyd Blankfein hired a lawyer. Goldman later said Blankfein and other executives hired outside lawyers to advise them after the U.S. Senate referred a report on the bank's securitization activities to the Justice Department.
Markets will focus Tuesday on new home sales and the Richmond Fed survey, both at 10 a.m. ET. The Richmond Fed takes on more importance than usual because it is fresh August data and it follows on the surprisingly steep decline in the Philadelphia Fed survey last week. There is also a 1 p.m. auction of $35 billion in 2-year notes.
In Europe, French Finance Minister Francois Baroin meets Tuesday with Germany's finance minister, Wolfgang Schaeuble to flesh out the proposals released last week by French President Nicolas Sarkozy and German Chancellor Angela Merkel. That would include a transaction tax on financial institutions, a more uniform corporate tax for euro zone members and a tighter fiscal union for the 17 nations.
Oil markets will again be in focus. The advances made by Libyan rebels into Tripoli over the weekend helped drive European benchmark Brent crude prices lower. Brent touched a low of $105.15 per barrel in the New York session, but it was down just 0.3 percent to $108.36, at the close. Nymex crude gained $1.86 per barrel, or 2.3 percent to $84.12. Libya, prior to the rebellion, was producing about 1.6 million barrels a day.
Despite the big swing, stocks traded more quietly than in recent sessions Monday. But not so for corporate bonds - investment grade and high yield.
"We've seen some real serious widening going on. High yield is getting smoked," said Joel Levington, director of corporate credit at Brookfield Investment Management.
Early Monday, the spreads on the Merrill Lynch high yield index was 750. "That implies about a 60 percent chance of recession."
"It's a very choppy market. It's tough to get good bid/ask spreads. It's pretty wide right now and it's kind of like looking for a hot potato. If you have "risk on" credits, you're probably getting hit pretty hard right now," Levington said.
Abdullah Karatash, head of U.S. fixed income credit trading at Natixis, said Monday's market behavior was odd, and it is apparent that some banks have been favoring the safety of Treasurys over riskier corporate credits. Bond funds are also seeing high levels of redemptions, especially in high yield which are viewed similar to equities.
"This is a day when stocks are positive. They high yield index is 12 basis points wider on the day. A normal move on a day like this with stocks positive, should be flat to slightly higher," said Karatash. "Stocks are closing positive to flat and these spreads are still closing wider. That's a sign there's some sort of bifurcation...Credit continues to trade heavy and there's no risk appetite."
Karatash said he expects the 2-year auction to be well bid.
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