FINANCIAL MARKETS : Dollar Rallies on Trade Deal; T-Bond Yields Push Higher
The weekend trade accord between the United States and Japan pushed the dollar up Monday against leading currencies, with the buck briefly hitting the psychologically important level of 100 yen for the first time in a month.
But bond and stock markets were weak on the first day of the fourth quarter. Long-term bond yields jumped to new 27-month highs on word of an unexpected surge in raw materials prices.
On Wall Street, the Dow Jones industrial average added 3.70 points to 3,846.89, but every other major market index closed lower. Markets were also broadly lower in Europe and Mexico.
The dollar was the markets’ focus early in the day. The partial trade truce between Japan and the United States at least removed the threat of another forced devaluation of the dollar, so a “relief” rally ensued Monday.
The dollar closed in New York at 99.58 yen, up from Friday’s 99.15, after hitting 100.10 yen in the morning--the highest since Sept. 2.
The dollar also closed at 1.554 German marks, up from 1.552.
In the bond market, gloomy traders continued to sell on another batch of strong economic reports. Most troubling for bonds was Monday’s report by the National Assn. of Purchasing Management, a manufacturing trade association.
The group said its price index, which measures what manufacturers pay for raw materials, rose to 77.1% in September, the highest since August, 1988.
That sparked new inflation worries and sent interest rates rising across the board. The yield on 30-year Treasury bonds rose to a 27-month high of 7.85%, up from 7.81% on Friday.
Analysts worry that the economy’s strength will force the Federal Reserve Board to officially raise interest rates for a sixth time this year, perhaps as early as Friday--when the government reports on September employment.
Stock traders Monday seemed to be bracing for a Fed hike. In the broad market, losers topped winners by 13 to 8 on the New York Stock Exchange, and every broad market index fell marginally.
Analysts say the market’s best hope is that third-quarter corporate earnings top expectations.
But a report Monday from Advanced Micro Devices, a major semiconductor maker, didn’t help sentiment: AMD reported net income on target (up 41%), but warned of lower profit margins in the current quarter. That sent semiconductor stocks tumbling.
Among Monday’s highlights:
* AMD’s shares slumped 3 1/4 to 26 1/2 after its third-quarter report and its warnings about fourth-quarter results, which the company said would be hurt by higher costs associated with opening two new factories.
Other chip stocks falling included Intel, down 1 1/4 to 60 1/4; Micron Technology, off 2 1/8 to 32 3/8; Texas Instruments, down 1 7/8 to 66 1/8, and Cyrix, off 2 7/8 to 42 3/8.
* Financial stocks were broadly lower as interest rates rose. Merrill Lynch lost 1 1/8 to 33 1/2, Dean Witter dropped 3/4 to 36 7/8, First Interstate fell 7/8 to 80 1/4 and SunAmerica was off 7/8 to 40 3/4.
* On the plus side, drug stocks continued their recent rally. Merck rose 7/8 to 36 1/2, Schering-Plough gained 1 to 72 and Warner-Lambert added 1 to 81 1/4.
* Trading was heavy in Pacific Gas & Electric, which fell 7/8 to 21 7/8, and in SCEcorp, which rose 1/2 to 13 3/8. Rumors had some institutional investors trading out of PG&E; and into SCEcorp.
Overseas, European markets were hit by renewed selling. London’s FTSE 100 index dropped 42.8 points to 2,983.5 and Paris’ CAC 40 slumped 26.42 points to 1,852.83.
Mexico City shares also tumbled as nervous investors sold in the wake of the last week’s political assassination. The Bolsa index sank 60.1 points, or 2.2%, to 2,686.01.
In Tokyo, the Nikkei average gained 86.22 points to 19,650.03.
Market Roundup, D8
Interest Rates
30-year T-Bond: 7.85%
1-year T-Bill: 6.01%
