Indications: U.S. stock futures drop as Europe jitters linger

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By Steve Goldstein , MarketWatch

LONDON (MarketWatch) -- U.S. stock futures declined Tuesday, with worries over the health of the European banks at the forefront as the Federal Reserve begins its two-day interest rate setting meeting.

S&P 500 futures fell 5.4 points to 1,105.20 and Nasdaq 100 futures fell 7 points to 1,892.50. Futures on the Dow Jones Industrial Average dropped 40 points.

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U.S. stocks couldn't hold early gains Monday, as early optimism over China's decision to let the yuan move against the dollar was checked by worries over Europe's health when French bank BNP Paribas' credit rating was downgraded. After rising as much as 140 points, the Dow Jones Industrial Average finished with a decline of 8 points.

Tuesday's session includes data on May existing home sales as the Federal Open Market Committee begin its two-day meeting. As is custom, no comment is expected on the first day.

Steve Barrow, a strategist at Standard Bank, said the time to lock in rates is when the Fed removes language about keeping interest rates low for an extended period of time -- which he doesn't expect on Wednesday.

"The bottom line is that the time for fixing longer-term borrowings in the U.S. is not now, but it could be in the next few months," he said.

Overseas, a closely watched German business climate indicator made a surprise increase in June. The U.K. is set to announce a package of spending cuts and tax hikes, including a levy on banks.

Meanwhile, the People's Bank of China raised the reference rate on the yuan by 0.4%, though yuan in the over-the-counter market declined slightly.

Drug-store chain Walgreen /quotes/comstock/13*!wag/quotes/nls/wag (WAG 30.14, +0.05, +0.17%) , cruise operator Carnival /quotes/comstock/13*!ccl/quotes/nls/ccl (CCL 34.74, -0.67, -1.89%) , and after the close, computer software maker Adobe Systems /quotes/comstock/15*!adbe/quotes/nls/adbe (ADBE 33.13, -0.39, -1.16%) headline the earnings due for release.

In Washington, negotiations over financial sector reform continue.

The major Asian stock market indexes closed lower, and in late morning trade, the Stoxx Europe 600 fell 1.2%. BNP Paribas shares dropped 3.5% in Paris.

The euro /quotes/comstock/21o!x:seurusd (CUR_EURUSD 1.2258, -0.0061, -0.4952%) traded below $1.23, and oil futures fell by more than $1 a barrel. Yields on 10-year Treasury bonds fell 3 basis points to 3.22%.

Steve Goldstein is MarketWatch's London bureau chief.