Prime-Rate Cut Sparks Rally; Dow Gains 6.38
Stocks moved broadly ahead in moderate trading Tuesday after the banking industry’s prime lending rate fell to its lowest level in nearly seven years.
Prices closed below their best levels of the day, however.
Interest rate-sensitive issues, such as brokerage and bank stocks, paced the gainers. Mining stocks also rose as gold prices hit a two-month high.
The Dow Jones average of 30 industrials, up more than 8 points early in the session, finished with a 6.38-point gain at 1,304.77.
Advances overall led declines by more than three to two on the New York Stock Exchange, whose composite index rose 0.47 to 108.75.
Big Board volume swelled to 106.93 million shares from 82.17 million Monday.
Shortly after the opening bell, Morgan Guaranty Trust in New York, the nation’s fifth-largest commercial bank, cut its prime rate to 9 1/2% from 10%.
Other major banks, including industry leader Bank of America in San Francisco, quickly matched the reduction. It was the lowest level for the industry’s base lending charge since October, 1978.
Expectations of further declines in interest rates have been widespread on Wall Street because the economy continues to show signs of weakness. The Commerce Department on Tuesday said that housing starts tumbled 13.7% in May to their lowest level since last December.
Investors also have speculated that the Federal Reserve will soon cut its discount rate--that charged on Fed loans to financial institutions--from its current level of 7.5%. The rate was cut from 8% only last month.
The drop in the prime lending rate is in response to earlier declines in money-market rates, which determine banks’ cost of funds. On Monday, for example, yields on government securities dropped to their lowest levels in five years.
But offsetting the optimism over lower rates is the prospect that the sluggish economy will further erode corporate earnings. In particular, there is fear that the already troubled computer industry will report additional problems in the second half of 1985.
Among financial stocks, Chase Manhattan rose to 58 5/8, Citicorp gained 3/8 to 47 1/2, Phibro-Salomon jumped 1 1/8 to 41 3/8 and J. P. Morgan rose 1/2 to 51.
Mining stocks advanced after the price of gold rose $8.75 an ounce to $327.50 in New York. Campbell Red Lake Mines climbed 1 3/8 to 21 7/8, ASA rose 1 7/8 to 51 3/8 and Homestake Mining was up 1 1/2 at 25.
Commonwealth Edison, up 1/2 to 31 1/2, topped the NYSE’s active list after an 897,000-share block crossed at 31 1/8.
On the downside, Cummins Engine tumbled 5 to 65. The engine maker, citing lower demand, said it will cut its work force by 2,200.
RCA rose 1 1/8 to 45 in active trading while UAL Inc. fell 5/8 to 53 3/4.
Sperry, Ford Linked
A rise in Sperry Corp.’s stock price and active trading in Ford shares helped fuel renewed Wall Street speculation that Ford is holding merger talks with the seventh-ranked computer maker following the collapse Monday of merger talks with Burroughs Corp. Ford’s stock closed Tuesday at 45, down 3/8, while Sperry ended at 51 7/8, up 1/2 from Monday’s close.
Some have speculated that Ford is interested in buying Sperry’s languishing New Holland farm-equipment business if the price is right. Others say the auto maker may also see a good fit between Sperry’s avionics business and Ford’s aerospace unit.
Peter Labe, an analyst with Drexel Burnham Lambert in New York, warned that Sperry risks disaffecting computer customers and choking off sales with continued talk of a merger. “They’re not giving an impression that they’re very committed to the computer business,” he said. “They have to act decisively--either merge or put out a major statement saying they’re not interested.”
