Stabilizing Dollar Helps Stocks; Dow Gains 48.56 : Markets: Traders also respond to a drop in commodity prices and bond yields. But some analysts see a ‘flash rally.’
U.S. stocks and bonds staged a surprise rally Monday, responding in part to a stable dollar and to another sharp fall in commodity prices.
The Dow Jones industrial average soared 48.56 points to 3,685.50, retracing most of Friday’s 62.15-point plunge.
But many Wall Streeters warned that the markets’ rally was largely technical in nature and that bearish trends in the dollar and interest rates suggest any rebound could be short-lived.
“It’s a flash rally,” insisted Douglas Kass, a bearish analyst at JW Charles Securities.
Stocks opened lower early Monday, with the Dow quickly losing 25 points in the wake of the dollar’s first post-World War II close below 100 Japanese yen overnight in Tokyo trading.
The U.S. market was also pressured by steep overnight losses in most Asian stock markets. Japan’s Nikkei-225 stock index, for example, slumped 465.79 points to 20,300.96 on Monday.
But as the dollar inched higher in New York--without significant central bank intervention--buyers returned to stocks and bonds.
Because so many traders had expected the markets to spiral lower Monday, the turn in prices probably sparked heavy buying related to “short covering,” analysts said.
Short covering occurs when bearish traders who sell stock short--that is, they sell borrowed shares, expecting further price declines--rush to buy back shares on the open market, in order to close out their positions.
The Dow’s rise accelerated through the day, which often denotes panicked short-covering, traders noted.
Still, stocks also got some fundamental help from a slide in bond yields, which keyed off the latest dive in commodity prices.
While a jump in coffee prices stole the spotlight, many other commodities tumbled, including cotton, oil, pork bellies, sugar and gold. Near-term gold futures dropped $6.40 an ounce to $384.70 on the New York Comex.
“There are very few plus signs in the commodity world,” said Jeff Wilson, editor of the Brock Report, a farm marketing newsletter.
With falling commodity prices suggesting renewed deflation, bonds responded well. The yield on the 30-year T-bond fell to 7.45% from 7.52% on Friday.
Some analysts said stock and bond markets may also be reconsidering the importance of the dollar’s slide. While fears remain that the Federal Reserve Board will seek to bolster the dollar by hiking short-term interest rates at its July 5 meeting, many economists aren’t convinced the dollar’s trend is of overriding concern.
“The stock market has been hammered by major media hype about the dollar,” said Alfred Goldman, analyst at brokerage A.G. Edwards & Sons. Yet the dollar has been falling for nearly a decade, without causing major problems for the stock and bond markets.
Even so, experts warn that investors may view another drop in the dollar as just another reason to avoid what have been very volatile markets this year.
Moderate volume of 250 million shares on the New York Stock Exchange on Monday showed there was no great conviction in the Dow’s rally. In fact, falling stocks were nearly even in number with rising stocks on the NYSE.
In the Nasdaq market of mostly smaller issues, the composite index gained 8.89 points to 702.68 as battered technology stocks rebounded. But winners and losers were about evenly matched on Nasdaq as well.
Among Monday’s highlights:
* European stocks showed surprising resilience in the face of currency turmoil, and that may have helped U.S. shares. In London, the FTSE-100 index gained 23.3 points to 2,899.9. In Paris, the CAC index inched up 4.58 points to 1,911.60. But Frankfurt’s DAX index lost 16.71 points to 1,988.60.
In Mexico City, the Bolsa index rocketed 51.92 points to 2,239.19 after the country’s interior minister rescinded an angry resignation letter he had submitted Friday.
* On Wall Street, technology and telecommunications stocks led the rally. They have been among the most beaten-down issues this month, on growing worries about a slowing economy.
Microsoft surged 2 3/8 to 51 7/8, Cabletron Systems leaped 8 1/2 to 95, IBM gained 1 5/8 to 61 1/2, Compaq jumped 2 1/4 to 33 1/4, Nextel surged 3 1/4 to 33 1/4 and BMC Software added 2 7/8 to 45 3/8.
* Biotech shares also gained after drug giant Eli Lilly agreed to a marketing pact with biotech firm Somatogen. Somatogen’s shares zoomed 2 3/4 to 9 1/2. Other biotech winners included Amgen, up 1 1/2 to 43 3/4; Centocor, up 14/16 to 11 5/8, and Cellpro, up 2 1/2 to 20 1/2.
* Industrial stocks powering the Dow higher included Caterpillar, up 4 to 105 1/8; GE, up 1 1/8 to 47 3/8; GM, up 1 5/8 to 52 1/4, and Union Carbide, up 7/8 to 26 7/8.
* Among financial issues, brokerage stocks recouped some of their recent losses. Merrill Lynch jumped 1 5/8 to 36 5/8, Dean Witter leaped 1 3/4 to 37 3/8 and Charles Schwab was up 1 3/4 to 27 1/2.
* Disney rose 1 1/8 to 43 1/8. Alex. Brown & Sons upgraded the stock to “strong buy” from “buy,” citing the strength of “The Lion King.”
* DOLLAR RALLIES: Greenback climbs back from postwar low against yen. A1
