Peace Talk on Wall Street Gives Dow a 57-Point Lift : Markets: Suspicion that an end to the Gulf War is near pushed prices for oil and gold down. It also boosted the dollar.
Stock prices soared, gold and oil prices plunged, and the dollar found new strength Friday thanks to Saddam Hussein’s conditional offer to withdraw from Kuwait.
Although Iraq’s offer was quickly rejected by coalition forces, market watchers believed it signaled an imminent end to the Persian Gulf conflict and a turning point for the U.S. economy.
“The markets are expecting a settlement to the war,” said Gerald Appel, president of Signalert in Great Neck, N.Y. “If it’s not this week, they expect it next week or the week after.”
A quick end to this costly conflict would be exceptionally positive for the U.S. economy because it could drive down oil prices, keep inflation in check and give the Federal Reserve more latitude in its efforts to spur economic growth.
That speculation had a dramatic impact on the financial markets:
* The Dow Jones industrial average jumped 57.42 points, closing at 2,934.65--only 65 points shy of its all-time high of 2,999.75 hit last summer.
* Oil prices fell sharply, closing on the New York Mercantile Exchange at $20.88 a barrel, down $1.44, for the benchmark crude for March delivery.
* Spot gold prices dropped $3.80 an ounce to $364.40 on the New York Commodities Exchange.
* The dollar rose against major currencies after swinging wildly in response to Iraq’s conditional offer.
* Bond prices were mixed, with the Treasury’s bellwether 30-year bond finishing up slightly for a yield of 7.98% from 7.99% the day before.
Although bonds were at least partly reacting to domestic economic reports, the bulk of the activity was tied to the war, market experts said.
“This morning set a positive tone for the market with the possibility of some sort of withdrawal from Kuwait,” said Jon Groveman, president of Ladenburg, Thalmann & Co. in New York.
Although most believed that this current offer would not change the war’s progress, it was seen as a sign of Iraq’s weakness.
“Hussein has not been able to fight back,” Appel said. “Unless he is suicidal, he is going to try to find a way out.” And many believed Friday’s offer was the first step.
However, U.S. stocks were also boosted by computerized program trading, which was at a fever pitch Friday because of the expiration of certain index options and futures contracts.
Meanwhile, the oil market headed into a free fall in early trading, only partially recovering once it was clear that Hussein’s offer was sure to be rejected. Still, the feeling among oil traders was that if Hussein “made one concession after a month of bombing, he’ll make more after a month and a day,” one trader noted.
Oil prices are expected to fall sharply once the war ends because of a worldwide glut, traders note. Some believe crude oil prices will plunge as low as $12 a barrel. Traders said they didn’t want to hang onto their inventory in case peace broke out during the three-day holiday weekend.
Gold prices, too, were reacting to the possibility of peace. A solution to the Gulf crisis would help the U.S. economy, reduce inflationary pressures and make gold--an inflation hedge and safe haven in bad times--less attractive.
And the dollar’s recent slump was put in check by the improved prospects for the U.S. economy, given a quick end to the war.
Only bonds seemed to react to the spate of economic reports released by the government Friday. Those reports generally confirmed what economists already know--the economy is in a serious slump.
Industrial production dropped 0.4% during the month of January, and companies said they were using only 79.9% of their plant capacity--which was down sharply from the previous month and was the lowest capacity utilization in four years.
The producer price index showed a decline of 0.1%, but once oil and energy prices were taken out, the inflation figure rose a troubling 0.5%. The U.S. trade deficit also narrowed, but it seemed that normally good news was also an indication of the domestic economic malaise. There was not much more demand for domestic goods than normal, but demand for foreign goods plunged as Americans continued to retrench. Nevertheless some experts maintain there are reasons to be hopeful.
“The bottom line is the stock market is rising and the bond market is not doing particularly well,” said Hugh Johnson, chief investment officer at First Albany Corp. in New York. “Although there are few signs of an economic recovery, the message is that one is coming. The market is a leading indicator.”
Some believe the market may have acted too soon, however.
“We could call it a preemptive strike” by the stock market, said Joseph Wahed, economist at Wells Fargo & Co. in San Francisco. “The market is often a leading indicator, but in this case, I think it is way ahead of the economic recovery.”
Leading the rally Friday on Wall Street was Boeing, up 3/4 to 49; Philip Morris, up 1 3/4 to 62, and American Telephone & Telegraph, up 1/2 to 34 3/8.
The New York Stock Exchange composite index of all listed common stocks rose 2.37 to 201.29. The Standard & Poor’s index of 500 stocks was up 4.84 to 369.06. The American Stock Exchange market value index climbed 1.93 to 342.73. And the NASDAQ over-the-counter index was up 4.40 to 448.71.
Advancing issues led decliners 1,184 to 455 on the NYSE. Some 222.37 million shares traded hands on the Big Board, compared to 230.75 million on Thursday.
