Stock prices dove and gold surged Tuesday after Russia plunged into political crisis, raising new worries about the global economy’s fragile health.
The Dow Jones industrials, off about 20 points at midday before word of the Russian turmoil reached Wall Street, quickly plummeted to a loss of 68 points in heavy trading, but buyers returned to the market late in the day.
The Dow finished with a loss of 38.56 points, or 1%, to 3,537.24--the lowest close since July 22. New York Stock Exchange volume soared to 300 million shares.
Today in Tokyo, Japanese stocks also responded fearfully to the Russian crisis, which was sparked by President Boris N. Yeltsin’s decision to dissolve Parliament and call for new elections. The Nikkei index was off 321.84 points, or 1.6%, to 20,144.81 at midday.
Meanwhile, some investors flocked back to gold, which had suffered a steep selloff in recent weeks. In New York, gold futures contracts shot up $9.40 to $362.90 an ounce.
The dollar also surged as traders abandoned European currencies for a safer haven. And in the bond market, long-term bond yields rose for a third straight session.
The likelihood of a showdown between Yeltsin and Parliament spooked investors because it adds another element of doubt about the world economy, said David Jones, economist at Aubrey G. Lanston & Co. in New York.
With Europe and Japan in recession and the United States growing only slowly, any potential shock to the global economy--such as armed conflict in Russia--risks delaying the chances of a meaningful recovery in business activity in 1994.
That could mean disappointing corporate profits at a time when stock prices are anticipating improved results.
In fact, U.S. stocks have been sliding since Labor Day on concerns that third-quarter corporate earnings expectations are too high. The Dow dropped 37.45 points Monday.
Russia’s troubles, should they balloon, could also affect inflation expectations. A further drop in Russian oil production, for example, could help shore up world oil prices, which until Monday had been tumbling on oversupply fears.
Crude oil futures rose sharply Tuesday for a second day, with the October contract up 42 cents to a three-week high of $18.12 a barrel.
Still, some analysts said they doubted that the stock market is poised for a free fall from here. “It’s encouraging that the markets came back from their worst point Tuesday,” Jones noted. Though losers outnumbered winners 5 to 2 on the NYSE on Tuesday, a major selloff would have produced a much more lopsided ratio, traders said.
David Holt, analyst at Wedbush Morgan Securities in Los Angeles, said stocks have been ripe for profit taking after their summer surge. Tuesday’s trading, he said, “was a pretty regulated move throughout the day.”
Holt said it wouldn’t be extraordinary for stocks to give back about half their summer gains. That could mean another 2% drop in such broad indexes as the Standard & Poor’s 500, he said. The S&P; has lost 1.8% since Labor Day.
While investors are concerned about third-quarter earnings, analysts noted that similar worries also knocked stocks lower in June in anticipation of second-quarter results. But many companies reported surprisingly good results.
Among Tuesday’s highlights:
* For a second day, traders pummeled industrial stocks whose earnings are most sensitive to economic swings. Alcoa tumbled 1 7/8 to 66 7/8, Allied-Signal lost 1 7/8 to 72 1/8, Dow Chemical plunged 1 7/8 to 56 7/8, Goodyear sank 1 1/2 to 44 and Caterpillar dropped 1 7/8 to 77 1/8.
* Brokerage stocks fell on worries about the bull market’s longevity. Merrill Lynch dropped 2 3/4 to 95 3/8, Salomon tumbled 2 7/8 to 47 5/8 and PaineWebber fell 1 3/8 to 30 7/8.
* On the upside, many technology stocks rallied. They were led by computer networking firm 3Com, which shot up 3 3/8 to 30 5/8 on stronger than expected first-quarter earnings.
Elsewhere in the tech sector, Adobe Systems added 1 5/8 to 18 3/4, Hewlett-Packard rebounded 2 to 67, Sybase gained 1 1/2 to 57 and Cabletron Systems was up 1 1/8 to 104.
* Major drug stocks also rallied ahead of President Clinton’s health care reform speech today. Merck rose 1 to 31 1/2, Pfizer soared 2 3/8 to 61 3/8 and Bristol-Myers Squibb gained 1 1/2 to 58 7/8.
* Among new stock issues, Carlsbad-based golf club maker Cobra Golf was well received, despite the market gloom. The company sold 3.25 million shares at 21 each. By the close, the price had rocketed to 31 3/4 on Nasdaq.
Many investors are betting that Cobra will follow the success of Callaway Golf, another Southland golf club maker whose stock has been one of this year’s hottest.
Overseas, European markets were closed before Russia’s crisis unfolded. In Frankfurt, the DAX index added 13.01 points to 1,925.85. London’s FTSE-100 index edged down 2.9 points to 3,001.6.
In Tokyo on Tuesday, the Nikkei average had rebounded 200.62 points to 20,466.65.
The turmoil in Russia drove safety-minded investors to shorter-term Treasury securities, while encouraging profit takers to continue selling the 30-year bond.
The yield on the 30-year bond closed at 6.12%, up from 6.10% on Monday and the highest since Aug. 30, when it was also 6.12%.
In a sense, however, the Russian crisis helped the U.S. Treasury: The news broke after the Treasury sold $16 billion in new two-year notes. While demand at the auction was lackluster, investors became more active buyers later in the day on concerns about Russia.
The two-year notes were sold at a slightly higher than expected yield of 3.94%.
Today, the Treasury will sell new five-year notes, demand for which also might get a boost from the Russian situation, traders said.
News of the Russian turmoil hit the currency markets late in the day, when activity was thin and many traders were short dollars--meaning they had sold dollars they had borrowed, figuring they could buy them cheaper later on, before returning them.
Instead, the dollar shot up in value, prompting a scramble by traders to cover themselves.
Traders said investors bailed out of German marks, the dominant European currency, because of Germany’s proximity to Russia and its status as a major creditor to the states of the former Soviet Union. The dollar closed in New York at 1.637 German marks, up from Monday’s 1.612.
The greenback also ended at 106.25 Japanese yen, up from 104.67 yen Monday, when the Japanese central bank cut a key lending rate, the discount rate, by 0.75 percentage point.
Market Roundup, D6
* RUSSIAN TURMOIL
President Boris N. Yeltsin gambles, dissolves legislature. A1.