Interest Rate Hopes Boost Stocks; Dow Up 37 to New High
The stock market rocketed to a new high Thursday on the strength of two expectations that are at odds with each other: lower interest rates and higher oil prices.
The Dow Jones industrial index jumped 37.13 points, or 1.3%, to close at a record 2,969.80, surpassing the previous high of 2,935.89 set on June 15. Trading was the heaviest in eight weeks, with 211.51 million shares changing hands on the New York Stock Exchange.
The spark for the broad market’s rally was Federal Reserve Board Chairman Alan Greenspan’s acknowledgment that skittish banks may be keeping a tighter rein on credit than the Fed desires. To counter that effect, the Fed may have to bring down market interest rates, Greenspan told the Senate Banking Committee.
Many investors have been betting on a Fed-induced cut in interest rates all year. Lower rates could help guarantee that the economy won’t slip into a recession. Also, a drop in yields on bonds and bank CDs would make stocks a more attractive alternative for many investors--possibly fueling another prolonged rally.
While some market strategists argue that stocks’ current prices already reflect any drop in rates ahead, “I think it really helped for the fact that he (Greenspan) said it,” said David Holt, technical analyst at Wedbush Morgan Securities in Los Angeles.
Many analysts now expect a decline of about one-quarter point in market interest rates over the next few weeks. That would bring the benchmark short-term interest rate--the fed funds rate--down to 8% from the 8.25% that has prevailed for most of this year.
Still, some Wall Streeters believe that stocks have now gotten ahead of themselves and that a setback is more likely soon than a powerful advance. “Investors want to draw good from every piece of news out there,” warned Steven Einhorn, strategist at Goldman, Sachs & Co. in New York.
Einhorn noted that most of the Dow’s 37-point rise Thursday was fueled by strength in oil stocks, as oil prices soared nearly $1 a barrel on reports that Saudi Arabia, the biggest member of the Organization of Petroleum Exporting Countries, would accept a lower production quota to help curb the cartel’s output.
Among major oil companies, Chevron gained 2 7/8 to 73 7/8, Atlantic Richfield jumped 4 1/4 to 121 7/8, Unocal added 2 to 29 3/4 and Mobil rose 1 7/8 to 63 1/2.
Rising oil prices suggest higher inflation and less potential for a sharp decline in interest rates longer-term, analysts note.
Nonetheless, the optimists say stock investors may be responding this year to a generally bullish environment for stocks worldwide: the spreading of capitalism to nearly every corner of the globe.
Holt also noted that stocks have been in a holding pattern for the past month, after rocketing in May. With Thursday’s surge, Holt’s short-term technical signals gave a “green light” to another upward push, he said.
Takeover news also helped: Contel surged 7 1/8 to 35 1/8 on word that it will merge with GTE Corp. in a $6.2-billion stock swap. GTE slid 1 1/4 to 29 3/4. The news helped fuel a jump in other phone stocks, including Rochester Telephone, up 3 to 34 3/4, and Telephone & Data System, up 1 7/8 to 38 1/4.
Meanwhile, Motel Six surged 2 5/8 to 19 1/4. After the close, the company revealed a buyout offer from a French firm for $22.50 a share.
In the broad market, 987 stocks rose and 545 fell in NYSE composite trading. Most other market indexes failed to follow the Dow to record highs. The S&P; 500 index rose 4.21 points to 365.44, shy of the 367.40 record mark set June 4.
Other highlights:
* Software giant Computer Associates plunged 6 1/4 to 10 1/4 on word of disappointing earnings. But investors continued to flock to other high-tech issues, including Conner Peripherals, up 2 1/8 to 29 7/8; Microsoft, up 2 to 77 1/2, and Western Digital, up 1/2 to 14 1/4.
* Buying also was centered in many global consumer-goods stocks that have led the market recently. Procter & Gamble rose 1 5/8 to 90 7/8, McDonald’s added 1 to 37 and Nike jumped 2 3/4 to 91 7/8.
* Fluor soared 2 3/4 to 46 5/8 after Merrill Lynch reiterated its positive view of the engineering firm.
In Tokyo, stocks closed sharply higher as computer program buying in the final moments of the trading day made the Nikkei index jump in an otherwise quiet market. The 225-share Nikkei average was up 281.14 points, or 0.87%, to 32,575.32.
In London, the Financial Times 100-share index rose 10 points to close at 2,370.5. In Frankfurt, West Germany, shares closed mixed after a volatile session. The DAX index ended 1.67 points lower at 1,916.22, just off the day’s lows.
CREDIT
Fed Chief’s Hint Sends Bonds Up Interest rates tumbled and bond prices climbed Thursday after Federal Reserve Chairman Alan Greenspan indicated that the central bank may push rates lower because of a crunch in bank lending.
Greenspan’s comments before a congressional committee sparked a flurry of buying near noontime that resulted in an abrupt reversal in price trends.
The Treasury’s benchmark 30-year bond climbed 3/4 point, or $7.50 per $1,000 face amount, after being down $2 earlier in the session.
Its yield, which falls when prices rise, dropped to 8.49% from 8.56% late Wednesday.
Declines in short-term rates were even larger, with yields on one-year Treasury bills falling a remarkable two-tenths of a percentage point.
Greenspan told the Senate Banking Committee that slow growth in the money supply and an increase in average interest rates on commercial loans indicate credit conditions may be tightening independent of central bank action.
Analysts said the relaxation in rates could come fairly soon.
“I would think he would move by the end of this month,” said Robert Chandross, chief economist at Lloyds Bank PLC in New York.
Before Greenspan testified, bond prices were trading lower than Wednesday’s amid speculation that reports--to be released today--on June retail sales and producer prices will be stronger than expected.
The federal funds rate was quoted at 8.25%, down from 8.313% late Wednesday.
CURRENCY
Dollar Sags on Interest Rate News The dollar tumbled in a selloff sparked by Greenspan’s comments.
The Fed chief’s comments in congressional testimony caught many foreign exchange dealers holding portfolios weighted heavily toward the dollar.
Renewed technical buying in late-afternoon New York trading carried the dollar above its session lows against other key currencies, but it still ended below Wednesday’s closing levels.
In overseas and early U.S. trading, the dollar was driven higher in buying inspired by lack of currency-related announcements at the conclusion Wednesday of the seven major industrialized nations’ summit in Houston.
It had been expected that the leaders would express support for a stronger Japanese yen.
The dollar abruptly reversed course around midday in New York after reports of Greenspan’s comments to the Senate Banking Committee reached the market.
Lower U.S. interest rates would tend to reduce returns on dollar-denominated investments and curb demand for dollars.
Late dollar rates in New York, compared to Wednesday’s late quotes, included: 1.6355 German marks, down from 1.6540; 1.3895 Swiss francs, down from 1.4020; 5.4910 French francs, down from 5.5515; 1,198.75 Italian lire, down from 1,211.25; and 1.15675 Canadian dollars, down from 1.15885.
The British pound closed higher despite a day of speculation related to the British Trade and Industry Secretary’s criticism of West Germany, France and the European Economic Community.
The pound fell in European trading when Nicholas Ridley’s remarks were published in a magazine, but it closed at $1.7995, higher than late Wednesday’s $1.7980.
A pound was quoted at $1.8130 late in New York, stronger than Wednesday’s late level of $1.7995.
Earlier, in Tokyo, the dollar rose to 148.90 Japanese yen from 148.10. In London late Thursday the dollar was quoted lower at 148.45 yen. It traded late in New York at 147.40 yen, down from 148.40 yen late Wednesday.
COMMODITIES
OPEC Compromise Ignites Oil Prices Oil prices rocketed higher after Gulf producers agreed on a compromise to wipe out the world glut that has dragged down the market this year.
On other commodity markets, gold and silver futures rose; grains and soybeans were mixed; coffee fell, and livestock and meat futures were mixed.
Petroleum futures surged their permitted daily limits in late trading on the New York Mercantile Exchange amid reports that Saudi Arabia had expressed willingness to reduce its OPEC crude-production quota.
Crude oil prices have fallen sharply this year due to the glut that analysts have attributed to overproduction by the Organization of Petroleum Exporting Countries.
Traders have grown edgy over the possibility that OPEC members will act to reduce their crude output at a meeting later this month.
West Texas Intermediate crude settled 78 cents to $1 higher, with August at $18.46 a barrel; heating oil was 2 to 2.66 cents higher, with August at 53.04 cents a gallon; unleaded gasoline was 1.9 to 2.57 cents higher, with August at 60.57 cents a gallon.
Crude oil futures are limited by the exchange to daily moves of $1. The limit for refined products is 2 cents, except for the nearest-term contracts, which carry no limits.
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