Microsoft ruling weighs on Wall Street

US stocks sagged this week in thin trading as investors fretted over a small but unexpected rise in inflation, higher oil prices and troubles for mortgage lenders.

A rally in chipmakers propelled the tech-led Nasdaq Composite to a six-year high, but the fragile market mood was undermined by downbeat news, including a court decision against Microsoft.

“When volumes are low – and this is generally one of the slowest weeks of the year – it tends to magnify moves,” said Arthur Hogan, chief equity strategist at Jefferies and Co.

“The market is switching from the earnings season to watching more economic themes. This transition often increases volatility because of overreactions to new economic data, as we saw this week. It is going to be a choppy market for the next month.”

The Dow Jones Industrial Average closed 0.3 per cent lower on Friday at 12,647.64, down 0.9 per cent on the week. The S&P 500 was down 0.4 per cent at 1,451.23, 0.3 per cent lower on the week.

Two catalysts for profit-taking were data showing a stronger increase than expected in consumer prices in January and Iran’s refusal to stop uranium enrichment, which boosted oil prices.

A court decision in which Microsoft was hit by a $1.52bn patent infringement award also weighed on sentiment on Friday. Shares in the technology group were down 1.7 per cent to close at $28.90 on Friday.

Microsoft warned that the case, which was won by Alcatel-Lucent, would have implications for many groups involved in digital music. Shares in Apple and Dell were largely unaffected on Friday.

The homebuilding sector slipped back after Toll Brothers reported a sharp fall in profits and offered little encouragement to people looking for a rebound in the housing market. The S&P Homebuilders index, which has been broadly on the up since July, was 4.3 per cent softer on the week.

There was more bad news from subprime mortgage lenders.

NovaStar saw its stock plummet after it reported losses and said it was reviewing its status as a real estate investment trust because it anticipated little or no taxable income in coming years. Its shares have halved to $8.48 this week.

New Century Financial, a big subprime lender, took another battering after analysts at Merrill Lynch warned of the risk of a cash crisis at the company. Its shares were down 20 per cent at $15.52.

Fears of wider problems hit other financial groups involved with mortgages. Countrywide stock dropped 2 per cent to $39.33 while shares in Lehman Brothers were 3.7 per cent softer at $79.04 on Friday.

By contrast, shares in H&R Block rose 1.9 per cent to $22.85 after the company expressed confidence about selling its subprime mortgage lending unit.

Chipmakers made yet another attempt at clawing back some of last year’s losses. The gains were spurred by Analog Devices‘ higher-than-expected profits and upbeat outlook. Its shares rose 12.2 per cent to $36.99 this week.

The positive sentiment lifted the Philadelphia Semiconductor index 3.3 per cent to its highest level in three months. The index has fallen 6.9 per cent in the last year.

The rally helped the Nasdaq Composite outperform other market measures as it rose 0.75 per cent over the week to 2,515.10.

But one technology stock that has performed well of late began to sag. Hewlett-Packard reported another strong set of earnings but analysts questioned whether the group could maintain the pace of growth. Its shares eased 4.6 per cent to $40.82.

In deal news, organic food retailer Whole Foods Market said that it had agreed to buy its smaller rival Wild Oats Markets for $565m.

The deal helped shares in Whole Foods rise 8.7 per cent to $50.47 this week. Shares in Wild Oats jumped 17.8 per cent to $18.46.

Footage on US breakfast television of rats scampering around a Yum! Brands restaurant in New York upset investor appetite for the company’s stock on Friday morning, sending shares in the restaurant group down 0.9 per cent to close at $60.51.