Dow Drops 39.98 as Hopes for Lower Interest Rates Fade
Stocks tumbled and bond yields soared Tuesday as Wall Street gave up hopes for lower interest rates and began worrying about third-quarter corporate earnings.
At the same time, the dollar fell to a near-record low against the Japanese yen as currency speculators searched for a new target after last week’s hammering of most European currencies.
In the stock market, the Dow Jones industrial average fell 39.98 points, or 1.8%, to 3,280.85 in a broad selloff fueled largely by interest rate concerns.
A jump in bond yields took stock traders completely by surprise. The yield on 30-year Treasury bonds shot up to 7.47% from 7.34% Monday, as the bond’s price fell $14 per $1,000 face amount.
The bond market’s problems began with an overnight report that Germany’s money supply ballooned in August. Because economic growth and inflation generally cue off a rising money supply, the news suggested that the German central bank would remain adamant about keeping interest rates high to restrain inflation--despite pressure from the rest of Europe to cut rates.
Meanwhile, hopes for lower U.S. interest rates faded after the Commerce Department said housing starts in August posted their largest gain in 18 months. Though many analysts said the report didn’t indicate a definite turn in the economy, some bond investors sold anyway, figuring there is much less chance now that the Federal Reserve will cut rates further.
“The (bond) market got its socks knocked off on the housing data,” said Anthony Chan, economist at Barclays de Zoete Wedd Government Securities.
Still, analysts said that bond trading was relatively quiet and that the heaviest selling was in the 30-year T-bond. Yields rose much less on shorter-term bonds and notes.
Economists noted that the housing data also showed a decline in August building permits, which suggested that the housing-starts surge could be a fluke. But bond investors chose to ignore that part of the report. “The market seems to be in a pessimistic mood,” said Kevin Flanagan, economist at Dean Witter Reynolds.
Some analysts said bond investors’ underlying worry is the presidential election. The thought of a Democratic victory is raising old fears about heavy new federal spending to stimulate the economy--which in theory would raise interest rates.
On Wall Street, the already weakened stock market was hit by heavy computerized selling after investment firm Wertheim Schroder & Co. issued negative comments on major auto makers, predicting slower sales.
In addition, GM said its forecast of fourth-quarter production would decline by about 27,000 vehicles because of sluggish demand.
GM shares tumbled 1 1/4 to 33, Ford slumped 2 3/8 to 40 1/4, and Chrysler lost 5/8 to 23 3/8.
In the broad market, losers outnumbering winners by 11 to 5 on the New York Stock Exchange. Volume, however, was moderate at 183.03 million shares, up from Monday’s 153.94 million.
Perhaps the day’s most upsetting news for many investors was a forecast of weak sales growth this quarter at Coca-Cola, one of Wall Street’s premier growth stocks.
Coke officials said third-quarter international sales will be flat because of the weak economy worldwide. Yet the company said it still expects to post 18% to 20% earnings growth for the quarter, thanks to cost-cutting and general expense controls.
Though analysts were encouraged by Coke’s promise that sales growth will resume in the fourth quarter, some investors took the view that slowing sales growth will inevitably lead to lower earnings growth. Coke stock plunged 2 1/2 to 42 1/4 in heavy trading.
The Coke report raised worries that third-quarter corporate earnings in general may be weaker than expected, which could cause major problems for the already skittish stock market in October.
Other food stocks came under pressure after Coke’s forecast. Pepsico dropped 1 1/2 to 37, H.J. Heinz dropped 1 1/8 to 39, CPC International lost 1 to 48 1/2, and General Mills sank 2 5/8 to 66 7/8.
Other market highlights:
* Among industrial stocks, other big losers included Allied Signal, down 2 to 52 3/4; IBM, off 1 1/8 to 83 1/4; 3M, off 1 1/8 to 100, and Phelps Dodge, down 1 3/8 to 48 3/8.
* Earnings worries were further heightened by bombshells from some smaller companies. Exabyte dropped 9 to 14 5/8 after the computer products maker said its third-quarter profit will fall short of analysts’ forecasts because of weak sales.
Also, Fingerhut lost 3 1/2 to 27. The direct-mail marketing company said its third-quarter results will fall under expectations.
* Gensia Pharmaceuticals’ stock plunged 38%, or 13 1/2, to 22 after the San Diego company said that international trials had failed to prove the effectiveness of Arasine, a promising drug designed to prevent heart attacks. Gensia’s stock was the second most-actively traded stock on the NASDAQ system, with nearly 7 million shares changing hands.
Overseas, a widely expected 1-point cut in British interest rates gave only a modest boost to the equity market, which took its lead from a solid rise in stock index futures. In London, the Financial Times 100-share average rose 25.9 points to close at 2,586.0.
News of another big increase in German money supply dealt a heavy blow to the Frankfurt bourse. The DAX average ended down 23.52 to 1,550.34.
Tokyo shares ended firmer, although off their highs, amid hopes that public funds expected to flow into the market will support prices. The Nikkei average was up 216.48 points to 18,282.72.
Currency
The dollar declined sharply against the Japanese yen, but settled mixed against the other major currencies.
Analysts said the dollar got off to a choppy start after the release of stronger than expected money supply figures in Germany. That led traders to speculate that the Bundesbank would not cut interest rates, and they sold the dollar.
But soon afterward, the Commerce Department said U.S. housing starts rose a robust 10.4% in August, the sharpest increase in 18 months. That, coupled with the continued turmoil among the European currencies, triggered a wave of dollar-buying as dealers sought a safe haven, said Marc Chandler, an analyst with the advisory firm IDEA.
Traders said speculators may have been targeting the dollar. But they also said many large Japanese insurance companies and fund managers are purchasing yen as they shore up their books ahead of the close of the first half of the Japanese fiscal year next week.
In New York, the dollar settled at 121.02 Japanese yen, down from 123.75 Monday. The dollar rose to 1.494 German marks, up from 1.484.
Commodities
Natural gas futures prices soared to their highest level in 22 months on the New York Merc, reflecting a tight near-term supply situation linked to Hurricane Andrew.
Natural gas for October delivery leaped 19.4 cents to $2.646 per 1,000 cubic feet.
Meanwhile, October light, sweet crude oil futures expired at $21.88 a barrel, down 4 cents, while the November contract rose 3 cents to $21.78 a barrel.
Precious metal futures rose on New York’s Comex, reflecting continuing uncertainty about European currency stability. October gold rose $1.30 to $348.80 an ounce, and September silver climbed 2.1 cents to $3.83.
