Blue Chips Tumble on Weak Auction
Stocks prices tumbled and bond yields soared Wednesday as Wall Street reacted to a disappointing Treasury auction.
The Dow Jones industrial average fell 27.37 points to end at 3,629.04 as skittish traders found no incentives to follow through on Tuesday’s 27-point gain. Tuesday’s rise had snapped a four-session losing streak.
In the broader market, losers swamped gainers by about 7 to 3 in the closing New York Stock Exchange tally. Big Board volume came to 277.41 million shares, up from Tuesday’s 295.62 million.
Keeping with the recent pattern, stocks were tied to bonds, which sold off after a 10-year notes auction met with soft demand.
The bellwether 30-year Treasury bond yield hit 7.64%, the highest since November, 1992, before giving up some gains later to end at 7.59% up from 7.49% at Tuesday’s close. Its price, which moves in the opposite direction, dropped 1 3/32 point, or $10.94 per $1,000 in face value.
Bond prices crumbled after the Treasury issued the poor results of its 10-year note auction, the second sale in a two-part financing operation.
Fewer buyers than expected were attracted to the auction and the average yield on the new notes rocketed to the highest level in two years, hitting 7.36%, up from 5.92% at the last auction on Feb. 9.
The impact on the bond market was immediate; the 30-year Treasury issue retreated sharply before recouping a bit.
Also dragging down the prices of long-term bonds was a spike in precious metals prices, a harbinger of inflation. Gold prices gained $3.00 an ounce to $381.80 on the New York Comex. Silver closed at $5.434, up 15 cents from Tuesday.
“There’s no catalyst that would make one want to buy stocks here,” said Guy Truicko, equity portfolio manager at Unity Management.
Market sentiment was briefly buoyed after Germany cut a half point off its key discount and Lombard rates Wednesday, raising speculation that the Federal Reserve would follow quickly with an interest rate hike in a coordinated action.
Tumbling technology stocks led to a sharper drop in secondary stocks. The Nasdaq composite index of mostly smaller stocks, fell 8.00 points to 717.00.
After Germany’s Bundesbank cut a half point off its discount and Lombard rates on Wednesday, stock market traders speculated that the Fed would follow up quickly to raise interest rates.
But the lack of a Fed action added to investors’ anxiety over how aggressively the central bank would move to cool the economy, analysts said. “There’s still a lot of question in a lot of people’s minds as to when the Fed is going to come in here and what they’re going to do,” said Philip Orlando, senior vice president of First Capital Advisers.
The Fed is widely expected to announces a hike in rates by the May 17 meeting of its Federal Open Market Committee.
Among the market highlights:
* Utility stocks continued to spiral downward, hit by deregulation and competition leading to concern over the group’s dividends. Commonwealth Edison fell 1 to 22 1/8, Houston Industries dropped 1 3/4 to 30 and Public Service Enterprise Group tumbled 1 to 25 7/8.
* Computer disk drive makers fell after the brokerage house Robertson Stephens downgraded Conner Peripherals, which fell 1 5/8 to 12 1/4, and Quantum, which slipped 1 1/4 to 14 1/2. Other disk drive stocks weak on the day included Western Digital, down 1 1/2 to 13 1/8.
* Caterpillar gained 3/8 to 107 1/8 after Merrill Lynch upgraded the stock’s investment rating.
* Philip Morris dropped 1 3/4 to 47 1/2 and American Brands retreated 1 3/8 to 30 3/4 after the brokers, Wheat First Butcher Singer downgraded the group, citing a negative atmosphere for the industry in Washington.
Trading overseas offered little to inspire Wall Street.
Mexico City’s Bolsa index, weighed down by falling U.S. stock prices and concerns U.S. interest rates, fell 33.52 points, or 1.51%, to close at 2179.57.
Tokyo’s 225-share Nikkei average closed up 232.35 points at 20,150.13. In Frankfurt, the 30-share DAX average rose 8.48 points to end at 2,243.63, while London’s Financial Times 100-share average fell 5.8 points to 3,130.5.
Hong Kong’s Hang Seng Index surged through the 8,900 resistence level as institutional buying intensified. The blue-chip indicator climbed 366.07 points to close the day at 8,906.16.
Meanwhile, the dollar closed mostly lower despite the cut in key German interest rates. In New York, the dollar fell to 104.33 Japanese yen and 1.669 German marks, from 104.40 yen and 1.674 marks respectively on Tuesday.
The dollar reversed Tuesday’s sharp climb, which had represented the first significant strength in the U.S. currency in a week.
Traders said the dollar’s decline Wednesday began shortly after Germany’s central bank lowered two key interest rates by a half percentage point to their lowest levels in five years. Other European central banks followed suit.
Traders had expected that would help the greenback as well as stimulate business activity in Europe. Lowering German interest rates tends to make the German mark less attractive against other currencies and thus helps the dollar.
But when the dollar failed to rise, traders sold despite the good news, said Bob Lynch a currency analyst at MMS International.
