FINANCIAL MARKETS : Stock Prices Get a Boost From Dollar
The stock market closed a trace higher Monday, barely reaching a new post-crash high as a rising dollar and surging Treasury bond prices shored up a market weakened by profit taking.
The Dow Jones index of 30 industrials, which surpassed the 2,500 level on Friday for the first time since Oct. 13, 1987, added 0.92 to 2,502.02. At one stage the average had been down about 10 points.
Advancing issues outnumbered declines by about 5 to 4 in nationwide trading of New York Stock Exchange-listed stocks, with 833 up, 695 down and 486 unchanged.
Volume on the floor of the Big Board came to 185.01 million shares, down from 242.41 million Friday, when the total was inflated by program trading linked to expiring options and stock index futures.
The dollar rose sharply in world currency markets Monday. That prompted strength in the American credit markets. (Story, Part I, Page I.)
That all was seen as positive for stocks. Falling rates mean less competition for stocks from interest-bearing securities.
In addition, analysts say, falling interest rates reduce the perceived chances that the economy will have to go through a recession.
But brokers also noted that the market has come a long way in its rally since last November, when the Dow got as low as 2,038. They said some traders moved today to cash in on those gains.
Avon Products led the active list and rose 2 3/8 to 34 5/8 on conjecture that the company, which recently fended off a takeover bid by Amway Corp., might become a target for other offers.
Compaq Computer, which introduced a new high-power desktop personal computer, climbed 3 1/8 to 87 1/8. International Business Machines, faced with that competitive development, dropped 1 1/4 to 109 7/8.
American Family fell 1 to 16. The company said it was looking for second-quarter operating earnings per share to be flat with the comparable period last year, and projected lower results for the full year than analysts had been estimating.
Stocks also closed modestly higher on the Tokyo Stock Exchange in cautious trading despite the sharp decline of the Japanese yen against the U.S. dollar. The Nikkei 225-share average, which jumped 144.65 points Friday, added another 65.90 points to 34,067.86.
On the London Stock Exchange Monday, share prices plunged amid heightened fears that European interest rates might have to rise to halt the dollar’s surge. The Financial Times 100-share index finished 35.7 points, or 1.6%, lower at 2,169.0.
Credit
The surging dollar and an improved outlook for inflation propelled bond prices sharply higher and drove interest rates downward.
The Treasury’s bellwether 30-year bond was up 13/16 point, or nearly $12 for every $1,000 in face value. Its yield fell to 8.59%, the lowest closing yield since March, 1988, and was down from 8.70% on Friday. Bond prices and yields move in opposite directions.
The dollar’s surge helped spark a sharp drop in commodity prices, and that in turn increased bond traders’ hopes that inflation would slow down and the economy would cool off, analysts said.
When the economy is slow, the Federal Reserve Board is less likely to tighten credit, which raises interest rates and sends bond prices lower.
Mitchell Held, chief financial economist with Smith Barney, Harris Upham & Co., said money that had flowed out of bonds as interest rates rose was moving back into Treasury securities.
“People are realizing the economy is slowing down,” he said. “People are under-invested in bonds.”
Ward McCarthy, a managing director of Stone & McCarthy Research Associates Inc., a money market research firm, said he expected bond prices to continue to move higher because “there’s a lot of people who want to get on the bandwagon.”
The federal funds rate, the interest on overnight loans between banks, was 9.688%, up from 9.675% on Friday.
Commodities
Grain and soybean futures prices dropped sharply on the Chicago Board of Trade, reflecting investor reaction to wet weather forecasts and the relentless rise in the dollar’s value.
On other markets, precious metals continued their slide, copper fell sharply, livestock and meat prices were mixed,and energy futures were off.
Grain and soybean prices dropped, largely in reaction to weekend rains in farm regions and a National Weather Service forecast of normal or above-normal rainfall for six to 10 days beginning Thursday.
Gold and silver continued to slide on New York’s Commodity Exchange.
“There nothing new to say about them,” said William O’Neill, an analyst for Elders Futures Inc. in New York. “They remain under pressure from the dollar.”
The dollar’s increasing attractiveness has caused many investors to sell their positions in gold and silver.
Gold was $2.90 to $5.40 lower, with June at $363.70 an ounce; silver was 12.3 cents to 15.8 cents lower, with May at $5.106 an ounce.
