Financial markets around the globe were jolted Tuesday as new verbal battles between the United States and Iraq again escalated tension throughout the Mideast.
The Dow Jones industrial average fell 52.48, or 1.98%, to close at 2,603.96. The index had been down more than 77 earlier in the day, when tensions between the United States and Iraq seemed to be at a boiling point.
However, the U.S. market managed a weak recovery at midday when Iraq's foreign minister said Iraqi President Saddam Hussein was willing to negotiate an end to the crisis.
"What we saw today, particularly this morning, was increased fears about a breakout of hostilities in the Mideast," said A. Marshall Acuff, portfolio strategist at Smith Barney, Harris Upham & Co. in New York.
Among the broader indexes, the New York Stock Exchange composite fell 1.9%, while the NASDAQ over-the-counter composite slumped 2.3%. Only 244 stocks rose for the day on the NYSE; 1,431 fell. Volume was a moderate 194.6 million shares versus 129.6 million Monday.
The effect of the rhetorical battle between the United States and Iraq was also felt in other markets, where prices rolled up and down in tandem with the posturing:
* Stock markets in London and Frankfurt, West Germany, which closed several hours earlier than those in New York, were off more sharply. In London, the Financial Times 100-share index fell 2.3%, while Frankfurt's 30-share DAX index dived 5.2% to close at a 1990 low of 1,549.96. Stocks also fell moderately in Japan, where the Nikkei index of 225 stocks was down 0.7%. Today, the Nikkei plunged anew, losing 1,018.87, or 3.9%, to a new 1990 low of 25,278.97 by midday.
* The price of the benchmark 30-year Treasury bond closed slightly down, boosting yields to 8.94% from 8.93% on Monday. Earlier in the day, as tensions peaked, bond prices fell low enough to boost yields above the 9% level for the first time since May. Meanwhile, the market for high-risk, high-yield junk bonds plunged on renewed recession worries.
* The price of the U.S. benchmark crude oil for September delivery seesawed, then ended down 15 cents, to $28.41 a barrel.
The markets were reacting to the verbal chess match between Hussein and President Bush, stock analysts said. The two leaders, who have been exchanging veiled and explicit threats since Iraq invaded Kuwait three weeks ago, became more aggressively hostile in the past 24 hours.
Bush began to call the 3,000 U.S. citizens held in Iraq and Kuwait "hostages" for the first time Monday and asked the U.N. to sanction use of limited force in the Persian Gulf. Meanwhile, Hussein said he had moved the hostages to key military installations in Iraq and Kuwait to serve as "human shields" against U.S. aggression.
"The temperature for a flash point has certainly been lowered. The markets are worried that (war) that would be bad for oil supplies and (consumer) prices," said Mark Green, economist at Wells Fargo Bank in San Francisco. "The situation is complicated by the fact that there is nothing else for the market to focus on."
What's more, the combination of a slow economy and growing inflation puts the Fed--whose policy-making arm met Tuesday in Washington--in a no-win situation. If it lowers interest rates, it is likely to spur more inflation. If it doesn't, the economy is likely to falter, spurring a recession, analysts said.
Among market highlights:
* Leading the Dow lower were Boeing, off 2 3/8 to 46 1/8; GM, down 1 1/4 to 36 3/8, and Procter & Gamble, off 2 1/4 to 76. Many industrial stocks, in general, were socked by renewed recession fears. Deere fell 3 7/8 to 52, and Ingersoll Rand dropped 2 1/4 to 42 1/4.
* Oil stocks were mostly lower. Chevron fell 1 3/4 to 78 1/4, Arco lost 1 3/4 to 137 3/8, Exxon fell 7/8 to 51 7/8 and Pennzoil dropped 1 5/8 to 80 1/2.
* Many tech stocks were hard hit again. Teradata lost 2 1/2 to 19 3/4, Ashton-Tate dropped 1/2 to 8, Microsoft fell 1 1/4 to 54 1/4 and IBM slumped 1 3/4 to 100 1/2. But bargain hunters bid Conner Peripherals up 3/4 to 21 1/4.
CREDIT Bond Prices Recover from Early Plunge Bond prices tumbled and then rebounded to finish nearly unchanged as traders embraced Iraqi statements offering faint hope of a peaceful resolution to the Middle East crisis.
The Treasury's benchmark 30-year bond fell 1/16 point, or 63 cents per $1,000 face amount, after losing more than $5 in morning trading before rebounding sharply. Its yield rose to 8.94% from 8.93% late Monday.
The bond market opened lower after U.S. bond prices skidded in European markets on fears of war amid escalating tensions in the Persian Gulf between Iraq and the United States.
But the long bond rebounded in the afternoon as oil prices fell, reducing inflationary fears that have wracked the credit market. Higher prices erode the value of fixed-income securities such as bonds.
The federal funds rate, the interest rate banks charge each other on overnight loans, was quoted at 7.875%, down from 8% Monday.
CURRENCY Dollar Buffeted by Mideast News The dollar finished mixed in New York after falling overseas in a volatile session that saw the currency buffeted by the conflicting reports about the prospects for stability in the Middle East.
Traders sold the dollar after a report that Iraqi President Saddam Hussein was willing to negotiate a peace settlement. But later reports that the Iraqis were mining Kuwaiti ports and refineries pushed the dollar higher.
Another round of bearish economic data further pressured an already weak U.S. currency. The government reported that the federal budget deficit jumped $25.9 billion in July, pushing the fiscal year's imbalance so far to $189.1 billion, compared to $123.7 billion at the end of July, 1989.
In Tokyo, the dollar fell to a closing 146.55 Japanese yen from 147.47 yen late Monday. Later in London, the dollar fell to 146.35 yen. In New York, the dollar closed at 146.80 yen, up from 146.51 yen.
In London, the British pound rose to $1.9215 from $1.9185 late Monday. In New York, it cost $1.9113 to buy one pound, less expensive than Monday's $1.9135.
Other late dollar rates in New York, compared to late Monday, included: 1.5645 German
COMMODITIES Seesaw Trading Day for Gold Futures War-wary traders sent gold futures prices into a strong rally then into a sharp reversal as Mideast developments sent conflicting signals Tuesday to the trading pits at the Commodity Exchange in New York.
Prices were up more than $6 an ounce early, then turned around and sunk nearly $9 below Monday's close before trimming the losses.
Gold futures settled $2.70 to $2.90 lower, with the August contract at $407.40 an ounce; silver was 3.4 to 4.1 cents lower, with September at $5.105 an ounce.
Market Roundup, D6