FINANCIAL MARKETS : Yields Rise Worldwide; Stocks Off
Worrisome economic news and surprise interest rate hikes by Sweden and Italy sent bond yields surging worldwide Thursday, knocking stocks lower.
The worst damage occurred in Europe, where German bonds, for example, suffered their biggest one-day price drop of the year. Broad stock indexes across Europe dropped 1% or more.
In the U.S. market, the Dow Jones industrial average lost 15.86 points to 3,750.90, fighting back from heavier losses early in the day.
European markets were riled by news that Sweden’s central bank raised its key lending rate for banks to 8% from 7.5%, the first increase in nearly two years.
Later in the day, the Italian central bank also boosted short-term rates, hiking its “discount” rate to 7.5% from 7%.
Authorities at the two central banks said they were responding to concerns that inflation may begin to rise if the economic recovery in Europe continues to build.
Urban Baeckstrom, governor of the Swedish central bank, the Riksbank, said it was moving at “an early stage to counter a tendency to increased inflation.”
In Italy, analysts said the central bank’s rate boost was in part to defend the weak lira--raising the potential for a repeat of the market explosion in Europe in the fall of 1992, when central banks competed to defend their currencies with higher interest rates.
That episode ended with the effective destruction of the so-called European Exchange Rate Mechanism that was designed to link currencies’ values.
On Thursday, the Swedish and Italian rate hikes caught investors by surprise and sparked a selloff in European bond markets. In Germany, the yield on the benchmark 10-year government bond soared to 7.22% from 7% on Wednesday.
In Britain, the yield on 15-year government bonds zoomed to 8.63% from 8.48%.
Bond yields had been easing across Europe in recent weeks, but Thursday’s action suggested that the decline has run its course, economists said.
In the U.S. bond market, yields were buffeted by Europe’s turmoil and by news of higher-than-expected wholesale inflation in July.
The Labor Department said the producer price index shot up 0.5% in July, the biggest increase in 15 months. Even though the “core” inflation rate, which excludes energy and food prices, was up only 0.1%, investors weren’t mollified.
Also weighing on the market were upward revisions by the Commerce Department in its May and June retail sales figures, indicating healthy demand and making July’s slight 0.1% decline in retail sales seem insignificant.
With those reports for a backdrop, the Treasury concluded its quarterly refinancing Thursday, selling $11 billion in new 30-year bonds and paying an average yield of 7.56% on them, above traders’ expectations.
The yield on existing 30-year T-bonds, meanwhile, jumped to 7.65% from 7.57% on Wednesday. Yields on most shorter-term Treasury securities also rose.
The bond market faces another potential jolt today, when the government reports on July consumer price inflation.
One casualty of the rise in European rates Thursday was the dollar, which sank as short-term “cash” investments in Europe became even more attractive compared to U.S. securities. The dollar tumbled to 1.561 German marks, down from 1.584 on Wednesday, and to 100.23 Japanese yen from 101.35.
On Wall Street, analysts said they were somewhat surprised that U.S. stocks didn’t fare worse. Losers topped winners by 13 to 7 on the Big Board, but broad stock indexes lost little ground.
Some analysts said investors may have already accepted that the Federal Reserve Board is likely to raise short-term rates again when it meets next week. The hikes in Swedish and Italian rates could help force the Fed’s hand if the dollar continues to weaken.
Among Thursday’s highlights:
* Losses were heavy in most European stock markets. London’s FTSE-100 index tumbled 28.8 points to 3,138.2, while in Paris the CAC index sank 25.24 points to 2,038.93.
In Stockholm, the SX-16 index plunged 2.2%, while Milan’s Mibtel index fell 1.1%. Frankfurt’s DAX index, however, eased just 5.09 points to 2,155.28.
In Tokyo, the Nikkei 225-share average gained 51.11 points to 20,821.36, and Mexico City’s Bolsa index rose 22.22 points to 2,596.89.
* U.S. industrial stocks were mostly lower. Alcoa lost 5/8 to 78 1/8, Exxon fell 7/8 to 58 1/8, International Paper dropped 7/8 to 74 1/8 and Caterpillar was off 1 1/2 to 103.
* Many technology stocks, however, continued to rally. Intel rose 5/8 to 60 3/8, Microsoft gained 1 1/8 to 55 1/4 and Computer Sciences surged 7/8 to 41 7/8.
* Southland cosmetics firm Neutrogena soared 4 7/8 to 26 1/2 after saying Wednesday that it is in talks to be acquired.
