FINANCIAL MARKETS : Goods News Is Bad News for Stocks, Bonds
News of an unexpected surge in orders for durable goods in June reignited investors’ inflation fears, driving interest rates up and stock prices down Wednesday.
Bond yields rose across the board at the same time that the Treasury sold $11 billion in new five-year notes.
The yield on the bellwether 30-year T-bond shot up to 7.61% from 7.54% on Tuesday.
In the stock market, the Dow industrials fell 15.21 points to 3,720.47, though broader indexes generally posted smaller declines. Still, losers topped winners by 12 to 9 on the New York Stock Exchange in moderate trading.
The Commerce Department reported Wednesday that orders to factories for long-lasting, big-ticket items such as cars and appliances jumped 1.3% in June.
The broad-based nature of the surge, which was more than twice market expectations, sparked new concern that the Federal Reserve Board will soon raise short-term interest rates again.
The larger-than-expected gain in orders points to an economy “that’s overheating, and that’s inflationary,” warned Stephen Gallagher, economist at Kidder Peabody.
The Fed has raised short rates four times this year in an attempt to moderate the economy’s pace and keep inflation in check.
The durable goods report didn’t help the Treasury on Wednesday as it sold the five-year notes. But the average yield of 6.98% was lower than the 7% some traders thought the Treasury might have to pay as bond market sentiment crumbled in the morning.
In the stock market, losses weren’t severe overall, as investors again weighed generally healthy second-quarter corporate earnings reports against the deteriorating bond market outlook.
Still, many analysts warn that the rally in stocks since July 1 is fragile and could be upended by another Fed rate hike.
“You still have a very nervous market environment,” said Marshall Acuff, strategist at brokerage Smith Barney.
Among Wednesday’s highlights:
* Biotech stocks, long depressed, stole the spotlight after Biogen said final trials of its multiple sclerosis drug showed that the disease’s progression was significantly slowed. Biogen said it will seek regulatory approval for the drug in the first half of 1995.
“The trial was designed with high expectations, and results are very promising,” said Jim Vincent, Biogen’s chairman. The company declined to provide further details of the study, which is to be presented Oct. 10 at a neurology meeting in San Francisco.
Wall Street, which expects the drug to be a billion-dollar seller, sent Biogen shares soaring 15 1/4 to 44 3/4 in wild trading.
Some other biotech shares also sparked to life on the news. Amgen jumped 1 15/16 to 49 3/8, Centocor leaped 1 7/16 to 11 7/16 and Genzyme added 5/8 to 28 1/8.
But Chiron plunged 5 1/8 to 52 5/8. Its rival drug for multiple sclerosis is viewed as threatened by the Biogen drug.
* Defense stocks rallied, buoyed by earnings reports from Loral, which rose 1 7/8 to 36 3/4, and Martin Marietta, which gained 2 to 45 3/8.
Other winners included Lockheed, up 2 1/8 to 63; McDonnell Douglas, up 2 1/2 to 113 7/8, and Raytheon, up 1 1/8 to 64 3/4.
* On the downside, some industrial issues were clipped despite the strong durable goods report. Bethlehem Steel led the selloff, down 1 5/8 to 20 3/4 after reporting earnings that fell short of Wall Street expectations.
Other industrial losers included International Paper, down 1 5/8 to 71; Alcoa, off 2 3/4 to 77 7/8, and Inland Steel, down 7/8 to 37.
* Auto stocks fell despite Ford’s healthy profit report. Ford fell 1 to 30 3/8, Chrysler dropped 1 to 47 1/8 and GM eased 3/4 to 49 7/8.
* Gum giant Wrigley tumbled 4 1/8 to 44 after its earnings fell short of expectations. But Disney added 1/2 to 42 1/8 on its report.
* Overseas, European stocks were pressured by another jump in bond yields there, as investors began to refocus on prospects for a resurgence of economic growth worldwide.
In London, the FTSE-100 index dropped 34.9 points to 3,082.3. Frankfurt’s DAX index fell 11.52 points to 2,140.44, while Paris’ CAC-40 index gave up 21.15 points to 2,055.69. European stocks had been rebounding in recent weeks.
In Tokyo, selling of export-oriented high-tech shares helped drag the market lower. The Nikkei 225-share index closed down 208.14 points at 20,137.23, threatening to fall below the 20,000 mark for the first time in 10 weeks.
In Mexico City, however, the Bolsa index soared 39.82 points to 2,433.22, its fifth straight advance and the highest level since June 7. Investors’ appetite for stocks has been recharged primarily by stronger-than-expected corporate earnings and by optimism over the ruling party’s chances in the Aug. 21 presidential election.
Among U.S.-traded Mexican stocks and funds, Telmex gained 1 1/4 to 60, Televisa rose 1 1/2 to 55 3/8, Coca Cola Femsa rose 1/2 to 29 3/8 and Mexico Fund jumped 7/8 to 31 3/8.
In currency trading, the dollar rose against the Japanese yen, after an influential U.S. economist and adviser to the Clinton Administration said trade sanctions against Japan are unlikely.
In New York, the dollar rose to 98.55 Japanese yen from 98.28 on Tuesday.
But the dollar fell to 1.574 German marks from 1.584.
In commodities markets, prices for frozen pork bellies tumbled to two-year lows at the Chicago Mercantile Exchange in reaction to abundant supplies, pointing to a possible fall in bacon prices for consumers.
