RUMBLING IN THE FINANCIAL MARKETS : DOMESTIC : Investors Shrug Off Budget Crisis

The failure of the federal budget agreement briefly jolted world markets early Friday, but investors soon shrugged off the setback amid predictions that the federal deficit--and U.S. interest rates--may still be cut.

After overnight declines in foreign stock markets, the New York Stock Exchange opened with a selloff that dropped the Dow Jones industrial average nearly 60 points. But, by midmorning, the index had turned up, and the Dow closed off a modest 6.19 points for the day at 2,510.64.

“With the President still out there pressuring and threatening, this game isn’t over yet,” said Robert Fagenson, a specialist on the floor of the NYSE, in a typical comment. “And, I would say it wouldn’t make too many people on Wall Street unhappy if the Gramm-Rudman law kicked in and forced some real budget cuts.”

At other markets around the world, traders said they had sensed growing opposition to the proposal. “I think a lot of traders estimated that it wouldn’t pass the first time around,” said Greg Burnett, a stock specialist at the Pacific Stock Exchange in San Francisco, adding: “They’ll come up with a solution.”

But though they were confident that an agreement could still be reached, traders and other investors acknowledged their frustration with Washington’s inability to work out a deficit-cutting plan. The deficit has long been a particular gripe of investors, because it diverts a huge amount of capital from the economy, keeping interest rates high and depressing the stock market.

Jay Goldinger, a market strategist at the Capital Insight brokerage in Beverly Hills, said he sat up Thursday night watching the foreign markets’ turmoil and was “shocked” when the House voted down the package.

“I told investors in London and Tokyo last night (Thursday) that I really expected Congress to act, and they just laughed at me,” Goldinger said. “They said, ‘Your Congress can’t get anything done.’ ”

“I think if there was a poll asking Americans what they thought of Congress right now, those guys would rate somewhere below used car salesmen,” said Larry Wachtell, analyst with Prudential Bache Securities Inc. in New York.

Traders said the U.S. bond market was also largely unaffected by the House vote, which came after 1 a.m. They said investors, already wary of Treasury bonds because of the budget impasse, continued to shun them Friday. The price of the benchmark 30-year bond was down only a small fraction for the day.

The dollar, which has been declining on expectations that a budget deal would bring lower interest rates, ended mixed against other currencies. But the currency market’s attention was no longer fixed on the government’s dilemma but on the British government’s announcement that it would join the European Monetary System to better support the pound.

Stocks took their hardest knocks overnight in the Tokyo and London markets, which were open in the hours immediately after the House vote, when investors had little information on how Washington next planned to try to solve the deficit problem.

Tokyo’s Nikkei 225-stock index was up more than 800 points Friday when news of the budget accord’s failure reached Japan. The news knocked more than 250 points off the index, and it closed up 549.46 points, or 2.5%.

The London market opened sharply lower after the news, and the Financial Times 100-share index was off by 35 points when the NYSE opened for business. But then the British government’s announcement, which dropped interest rates by a full percentage point, sent stocks there up sharply.

The London index rose 73.5 points to a closing of 2,143.9. “The whole thing was blown out of the water,” said Keith Skeoch, chief economist for the James Capel & Co. brokerage firm.

Traders in U.S. markets said they had come to work Friday expecting an ugly trading day in a market that has recently been haunted by fears of recession, higher oil prices and inflation.

Their anxieties seemed justified when the New York market opened and the Dow tumbled nearly 60 points in its first minutes. The fall was accelerated as investors turned to the computer-directed strategy known as program trading.

But traders said their fears began to subside as officials in Washington, including the congressional leadership and White House Press Secretary Marlin Fitzwater, began to speak of their hopes that a new agreement could be reached.

Some investors also took comfort from a government report showing that unemployment in the non-farm and manufacturing sectors had grown more than expected in September. “The news isn’t great for the poor souls who’ve lost their jobs, but it may mean the Federal Reserve Board will get worried about a recession and cut (interest) rates,” said James J. Maguire, a NYSE specialist.

By midday in New York, the initial burst of trading had given way to intermittent lulls in many markets. Traders on the Los Angeles floor of the Pacific Stock Exchange occasionally indulged in the luxury of a yawn, and one fashioned a small paper airplane and flew it over the heads of his colleagues.

“It’s calmed down, thank God,” one clerk said.

Trading volume on the NYSE was a moderate 153.38 million shares, compared to 145.41 million on Thursday. Declining issues outnumbered gainers by 893 to 598, and 464 were unchanged.

In New York, foreign exchange traders had expected Friday to be a slow day, even with the bad news of the House vote. But the news from Britain sent the pound aloft.

After the British government’s announcement, “there was a moment when nothing happened, when people were trying to figure out what was going on,” said Robert Nelson, senior foreign exchange trader at the Royal Bank of Canada in New York. Then calls from customers flooded in, lighting up all 35 lines of the desk’s telephone system, he said.

“From that point, the budget situation wasn’t getting much attention,” he said.

The pound finished almost four cents higher against the dollar, at $1.9525. The dollar also lost ground against the yen, trading at 132.20 yen late Friday in New York, compared to 133.83 yen Thursday.

Investors said they expect the budget crisis to remain a focus of the market’s interest at least through next week. “You’re going to see people tuned to C-Span,” predicted Goldinger, referring to the cable TV channel that broadcasts some congressional proceedings.

Staff writers Jeff Kaye in London, Nancy Rivera Brooks in Los Angeles and Jonathan Weber in San Francisco contributed to this story.