Dow Falls 30 on Interest Fears, Bond Weakness
MARKET OVERVIEW
* Weakness in the bond market induced by the prospect of rising interest rates dragged down stocks Thursday and knocked the Dow average off the record closing level reached a day earlier.
* Long-term Treasury bond yields continued to rise as Federal Reserve Chairman Alan Greenspan issued a staunch defense of the central bank’s decision to lean toward higher interest rates.
* The dollar plunged against the Japanese yen.
Stocks
A series of sell programs late in the session accelerated the downward momentum on Wall Street.
The Dow and broader market indicators registered modestly lower readings most of the day amid profit taking until the final hour, when the selling intensified.
The Dow Jones average plunged 30.18 from Wednesday’s all-time high, ending at 3,525.22. Losing issues widely outnumbered gainers on the New York Stock Exchange with 1,210 down, 767 up and 609 unchanged. Big Board volume came to 249.63 million shares, only slightly lower than the 278.59 million shares traded in the previous session.
Janet Engels, director of research at Sutro & Co., said the stock market’s recent volatility in the face of quarterly corporate financial reports made it vulnerable to a setback.
“With the bond market on the skids and some sell programs kicking in, the market took a hit,” she said.
Market watchers said Wall Street’s weakness was unsurprising given the so-so performance it turned in on Wednesday when the Dow crawled to a new high but the broader market declined.
Fresh evidence of sluggish conditions in the job market also weighed on stocks. The Labor Department’s weekly report showed the number of Americans filing first-time claims for jobless benefits unexpectedly shot up by 24,000 last week to the highest level in 13 weeks.
* Among companies releasing second-quarter results, Blockbuster Entertainment added 1 3/4 to 24 1/8 in heavy NYSE trading. It reported improved second-quarter earnings of 23 cents a share, up from 17 cents a share a year earlier.
* One heavily traded NYSE-listed loser was Colgate-Palmolive, which fell 2 to 48 3/4. A brokerage lowered its investment rating on the household products company after its earnings failed to satisfy Wall Street.
* In NASDAQ trading, several technology stocks were active. Microsoft moved 1 3/8 lower to 77 5/8 and Lotus Development fell 2 3/4 to 36 7/8. Lotus reported second-quarter operating income of 35 cents a share, up a penny from the year-earlier quarter.
Stocks closed mixed in foreign trading. London’s Financial Times 100-share average gained 6 points to close at 2,820.1. Germany’s 30-share DAX average ended down 0.29 points at 1,823.52, and Tokyo’s 225-share Nikkei average was up 34.90 points to 20,115.81.
Credit
The rise in bond yields was triggered by Federal Reserve Chairman Alan Greenspan’s comments in congressional testimony indicating that higher interest rates are inevitable in the future.
“When he starts talking about higher interest rates, the markets retreat,” said Don Hayes, director of investment strategy at Wheat First Butcher & Singer. “This was a case of Greenspan-induced jitters.”
The 30-year bond’s yield rose to 6.65% from 6.62%, pushing the price down 3/8 point, or $3.75 per $1,000 in face value.
In an appearance before the Senate Banking Committee, Greenspan bluntly warned that “at some point (interest) rates are going to have to move up.” The direct reference to interest rates was unusual for Greenspan, who typically mentions them in vague terms.
Short-term Treasuries were 1/16 point to 1/8 point lower, and intermediate maturities fell 5/32 point to 3/8 point, the Telerate Inc. financial information service reported.
On Thursday, the federal funds rate slipped to 3.125%, from 3.375% late Wednesday.
Other Markets
The dollar plunged against the Japanese yen but advanced against other major currencies as tensions flared in Europe’s exchange-rate system.
The dollar slid to 105.25 Japanese yen from 108.13 Wednesday following remarks by Deputy Treasury Secretary Roger Altman that the surplus in Japan’s current account, a broad measure of trade flows, could fall more quickly due to the recent appreciation of the yen and the Japanese government’s efforts to stimulate its economy.
His comments to the U.S. Senate Trade subcommittee indicated to the market that the Clinton Administration would not oppose further gains in the yen against the dollar.
But the more important development was an increase in tensions in the European Exchange Rate Mechanism, which sets maximum fluctuations for member currencies.
“It seems like we’re seeing a lot of flight to quality into the yen due to the uncertainty in the European market,” said Lee Kassler, a senior trader at National Westminster USA.
Rumors that the French franc would be devalued prompted dealers to dump the currency. The German central bank stepped in and sold marks for francs, said Lisa Finstrom, a currency analyst at Shearson Lehman Brothers Inc.
The latest tensions in the European system stem from a strong mark. Investors suspect the German central bank has backed off on any further cut in interest rates for fear of fueling inflation.
The dollar rose to 1.704 German marks, up from 1.698 on Wednesday. The British pound settled at $1.513, down from $1.517.
In commodities trading. Crude oil fell 30 cents to 17.63 a barrel on the New York Mercantile Exchange after OPEC President Jean Ping cast doubt on whether an emergency cartel meeting will be held this month.
Elsewhere, gold for current delivery closed at $391.10 an ounce on the Commodity Exchange in New York, up $1.90 from Wednesday. Silver for current delivery gained 5.1 cents to finish at $4.996 an ounce.
Market Roundup, D6
