Dow, Up 40, Closes Off 39 on Gulf Gloom

The stock market sold off sharply in afternoon trading today, wiping out a strong early gain, following word of no progress toward a settlement of the showdown in the Middle East.

Stock, bond and commodity markets swung wildly as news broke from talks in Geneva between Secretary of State James A. Baker III and Tarik Aziz, the foreign minister of Iraq.

The Dow Jones average of 30 industrials, up more than 40 points at its midday peak, closed with a 39.11 loss at 2,470.30.

That brought the average’s drop over the first six sessions of 1991 to 163.36 points, or 6.2%.

Declining issues outnumbered advances by about 5 to 3 on the New York Stock Exchange, with 578 up, 949 down and 463 unchanged.

Big Board volume totaled 191.10 million shares, against 143.39 million in the previous session.

The NYSE’s composite index fell 1.64 to 170.97.

Early in the day a U.S. description of the talks as “substantive” seemed to encourage traders, who apparently began the day with modest hopes at best for the meeting.

But that optimism abruptly deflated when Baker emerged from the meeting to report “I heard nothing that suggested to me any Iraqi flexibility” on the issue of its occupation of Kuwait.

Aziz later spoke of “grave differences” between the two sides.

Oil prices soared on that news and interest rates rose, reversing an early decline.

Bond prices lurched upward in early trading today as talks between the United States and Iraq to avert a Persian Gulf war went on longer than expected.

The Treasury’s bellwether 30-year bond soared 1 3/8 point, or $13.75 per $1,000 in face amount, around midday. Its yield, which falls when prices rise, was down to 8.26% from 8.38% late Tuesday.

Traders said they were heartened that today’s talks between Secretary of State James A. Baker III and Iraqi Foreign Minister Tarik Aziz had gone about five hours.

The duration suggested more was taking place than the personal delivery of a U.S. ultimatum for an Iraqi withdrawal from Kuwait by the U.N. deadline of Jan. 15.

“Without any concrete evidence, the fact they were in there talking seemed to indicate they were making some good progress,” said James Marshall, vice president and government securities trader for Clayton Brown & Associates in Chicago.

The apparently peaceful sign also caused the price of crude oil futures to tumble this morning on the New York Mercantile Exchange. The roughly $2 per barrel drop in the February contract combined with the peace-talk news to ease fears among bond traders of a new round of inflation which could decrease the value of government securities.

Also buoying bond prices was continued optimism after Tuesday’s apparent easing by the Federal Reserve of a key short-term interest rate, the federal funds rate.

Lower interest rates generally boost the value of government securities such as bonds and notes.

While analysts viewed the new target for Fed funds as 6.75%, down from 7%, the key rate traded at 5% around midday, up from 3% late Tuesday.

The rate, which represents the interest on overnight loans between banks, has been gyrating wildly in the last three sessions, as it often does around the end of reserve reporting periods for banks.

In the secondary market for Treasury bonds, short-term maturities were up 1/8 point to 9/32 point, intermediate maturities rose 11/32 point to 3/4 point, and long-term issues were up 1 7/32 point to 1 3/8 point, the Telerate Inc. financial information service reported.

The movement of a point is equivalent to a change of $10 in the price of a bond with a $1,000 face value.

The Lehman Brothers daily Treasury bond index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, was up 5.35 to 1,185.50.

Yields on three-month Treasury bills fell to 6.55% as the discount was down 5 basis points to 6.37%. Yields on six-month bills were down to 6.64% as the discount fell 6 basis points to 6.35%. Yields on one-year bills dropped to 6.67% as the discount fell 5 basis points to 6.27%.