STOCKS : Selloff in Bonds Leaves 10.81 Dent in Dow
The stock market shrugged off severe losses in the bond market and a decline in the dollar Monday, dropping back modestly after five straight gains last week. The Dow Jones index of 30 industrials, up 96.17 points last week, dropped 10.81 to close at 2,649.55.
Big Board volume totaled 140.11 million shares, down from Friday’s 164.33 million.
Declining issues outnumbered advances in nationwide trading of New York Stock Exchange-listed stocks, with 684 up, 830 down and 466 unchanged.
Although blue chips grudgingly gave up ground, traders said selling was surprisingly light in view of the steep selloff in the bond market.
The mild volume suggested that the stock market faltered more from a lack of buyers than an abundance of sellers, said Monte Gordon, director of research at Dreyfus Corp.
“After being up every day last week, we were ripe for some profit taking,” added Sid Dorr, head of institutional trading at Charles Schwab & Co.
The bond market, hit by inflationary fears and a round of central bank dollar selling, fell sharply.
Foreign investors often sell dollar-denominated securities when the U.S. currency is falling, because it cuts the overall return on their U.S. investments.
The dollar, which had gained roughly 4.5% against the yen since the beginning of the year, closed down at 149.75 yen from 150.25 Friday on central bank intervention.
Still, traders were impressed with the stock market’s ability to surmount the bond market’s fall--similar to its strength last week in the midst of Tokyo’s stock market plunge.
“I’ve been quite impressed with the resiliency of the market,” said Bradley Turner, chairman of McDonald & Co.’s investment policy committee.
Wall Street withstood a sharp selloff in the Japanese stock market a week ago, when blue chips posted a 38-point gain following a 4.5% fall in Tokyo stock prices.
“This market has just weathered a lot of bad news,” agreed Schwab’s Dorr. “It’ll be interesting to see how it reacts to good news.”
Shares of financial services giant American Express fell 1 7/8 to 27 1/2 following the company’s announcement that it plans to acquire the remaining shares of Shearson Lehman Hutton, its troubled brokerage subsidiary.
Shares of drug company Pfizer dropped 2 3/8 to 59 3/8 on rumors that a Prudential-Bache analyst said former Pfizer employees contacted her and alleged that the company covered up problems with its heart-valve product.
Pfizer said the allegations had no substance.
The Tokyo stock exchange closed lower but well off the day’s lows in listless trading. The key 225-share Nikkei index sagged 212.36 points to close at 33,845.20, wiping out most of Friday’s 227.98-point gain.
In London, stocks finished sharply lower on London’s stock exchange amid worries of another hike in British interest rates. The Financial Times 100-share index ended down 24.3 points at 2,330.5.
CREDIT Talk on Japan Rates Hurts Bond Prices In the credit markets, bond prices tumbled amid expectations that Japan’s central bank would raise interest rates, which raised speculation that foreign demand for U.S. Treasury securities would drop.
The credit markets also were hit with a wave of other negative news, including pessimistic comments by a Federal Reserve Board official on inflation and continued concern that the dollar was too strong against foreign currencies.
The Treasury’s benchmark 30-year bond sank 1 5/32 point, or $11.56 per $1,000 face amount. Its yield, which rises when prices fall, climbed to 8.65% from 8.55% late Friday.
The lead factor in the drop in the long bond was a belief that the Bank of Japan would raise interest rates, possibly as soon as today, said Ray Stone, a managing director of Stone & McCarthy Research Associates Inc.
Higher yields on Japanese government securities could result in less demand for U.S. Treasury securities--which would result in lower prices--because Japanese investors would be apt to buy their own government bonds if yields were competitive.
Traders said bond prices were also hurt by comments from Robert Parry, head of the Federal Reserve Bank of San Francisco, prepared for a speech to a real estate group.
In an outline for the speech, Parry said inflation would not begin to moderate until “well into 1991.” Inflation is a negative for the credit market because it erodes the value of fixed-income securities such as bonds.
Concern also persisted that the dollar was too high against foreign currencies--a situation that could lead foreign governments to sell holdings of U.S. Treasury securities in order to have dollars to sell in the foreign exchange market.
“The process of them selling their securities would just put added supply onto the private securities market,” lowering prices, said Steven A. Wood, director of money market research for BankAmerica Capital Markets in San Francisco.
The federal funds rate, the interest rate banks charge each other on overnight loans, was quoted at 8.25%, down from 8.313% late Friday.
COMMODITIES Supply Concerns Lift Coffee Futures Coffee futures prices soared above $1 a pound in New York amid rising concern about tight availability of high-quality coffee.
On other futures markets, copper and cotton futures surged; energy futures were higher; precious metals were mixed; grains and soybeans were mixed, as were livestock and meat futures.
Coffee futures settled 4.64 to 5.5 cents higher, with the contract for delivery in March at $1.045 a pound, its highest settlement since June 30.
Analysts said the rally, on the market’s fourth consecutive day of unusual strength, was not related to any change in the supply-demand picture but to the same factors that have recently supported the market.
Those factors include civil strife in the Ivory Coast, a supply shortfall in Mexico, a lack of availability from Ecuador and poor growing conditions for coffee in Colombia.
