Dow Falls 37.16 on Talk of Some Higher Overseas Interest Rates
The stock market’s Dow industrials tumbled below the 2,100 level Thursday, mirroring a plunge in bond prices.
The Dow Jones industrial index, which had gained 175 points in the past two weeks, gave back 37.16 points to close at 2,094.24.
Traders said investors were unsettled by rumors that West Germany and Japan may raise some of their interest rates, narrowing the chances of a decline in U.S. interest rates.
Losers outnumbered gainers by about 5-to-2 in nationwide trading of New York Stock Exchange-listed stocks. Volume on the floor of the NYSE came to 161.55 million shares, up from 150.26 million the day before.
Traders also said the market fretted that rising commodity futures in Chicago, reflecting the effects of a severe drought in the Midwest, would spell higher prices in the economy.
Sharpest Drop Since May
Index-arbitrage selling contributed to the drop, as did the market’s fundamental vulnerability after the Dow reached a post-crash closing high of 2,131.40 points Wednesday.
“We began the week overbought and a smaller-than-expected trade deficit made us even more overbought,” said Larry Wachtel of Prudential-Bache Securities Inc., referring to the bullish influence this week of a big drop in the U.S. trade deficit for April.
Thursday’s decline was the sharpest since the 37.80-point drop on May 11, when interest rates were once again the culprit. On that day, talk by Nigel Lawson, British chancellor of the exchequer, of possible interest rate increases overseas combined with a U.S. prime rate increase to knock the market off balance.
Investors began selling shares Thursday morning after the dollar and U.S. bond prices slid on rumors that West Germany’s Bundesbank and the Japanese central bank may raise some of their interest rates.
“That suggests not so much that our (U.S.) rates have to follow, but that our rates are unlikely to come down soon,” Wachtel said.
Traders linked the rumor that Japanese interest rates may rise to a report showing that the Japanese economy is growing at its fastest rate in 10 years. The economy expanded by 2.7% in the first quarter, lifting the nation’s annual growth rate well above the government’s forecast.
Jack Baker, head of trading at Shearson Lehman Hutton Inc., said the news unsettled Wall Street investors who fear a rate increase in Japan could lead to heavy profit taking in the Tokyo market, which could spill over into the U.S. securities market. Traders also noted that the Tokyo market may be vulnerable after hitting an all-time closing high early Thursday.
No Relief From Drought
Commodity futures surged in Chicago as traders saw no relief from the drought conditions, which should drive crop and commodity prices higher. Inflation- and interest-rate sensitive U.S. bond prices slumped, undermining share values.
“There was profit taking as expected, but investors were given a shove by the suggestion that monetary policy might be tightening in Germany and Japan,” said Hugh Johnson, senior vice president at First Albany Corp.
Further pressuring the markets was a government report that showed operating rates at American factories, mines and utilities rose to 82.9% in May, the highest level in more than eight years.
The report, well above market expectations, was interpreted as a sign that inflation may be lurking.
Analysts fear a crack in investors’ confidence, which has been building gradually, and described the drop as jolting. “It just points out what thin ice we’re on,” Johnson said.
Kimberly-Clark said takeover speculation appeared to be responsible for the sharp 3 gain in its stock to 62 3/4. The company would not elaborate, but traders identified two rumors. One postulated that a Japanese firm would bid $75 a share, the other that Revlon Chairman Ronald O. Perelman, spurned by Gillette, would go after Kimberly.
Irving Bank gained another 7/8 to 71. Investors are waiting to see if Irving’s board will accept Bank of New York’s latest bid, valued at between $75 and $76 a share.
Among actively traded issues, Texaco was down 3/8 at 49 1/2. The oil company, which will face Carl C. Icahn at its annual shareholders meeting Friday, announced a joint venture with a Saudi Arabian oil company.
General Electric was off at 43. The company said it will acquire Borg-Warner’s chemical division for $2.31 billion in cash.
Intermedics jumped 7 to 42. The company agreed to be acquired by Swiss-based Sulzer Bros. for $43 a share, or about $800 million.
Elsewhere, IBM fell 1 5/8 to 117 1/8, Deere fell 2 at 46 3/4, Philip Morris fell 1 1/8 to 83 and Smithkline Beckman was off 9 at 45 3/4. The pharmaceutical company predicted 1988 operating earnings will be below last year’s levels.
Indexes Lower
The Wilshire index of 5,000 equities closed at 2,689.383, down 35.833 from the preceding trading day.
The NYSE index fell 2.23 to 152.44.
Standard & Poor’s index of 400 industrials fell 5.40 to 311.96, and S&P;’s 500-stock composite index fell 4.68 to 269.77.
At the American Stock Exchange, the market value index fell 1.71 to 307.07. The NASDAQ composite index for the over-the-counter market closed at 387.10, off 1.98.
In Tokyo, share prices ended at a record high close in moderately active trading Thursday but were off morning peaks, following Wall Street’s last-minute rally on Wednesday, brokers said.
The Nikkei 225-share index rose 53.80 points, or 0.19%, to 28,147.32. It peaked at 28,228.31 just before the midday close.
Share prices fell on the London Stock Exchange as equities followed Wall Street lower, giving market players an opportunity to sell and take some profits.
At the close, the Financial Times 100-share index was down 7.4 at 1,861.9.
