FINANCIAL MARKETS : Bond Yields Rise; Dow Drops 9.76
Stock and bond markets’ excitement over Tuesday’s Republican victory in Congress evaporated Thursday, as bond yields rose and stocks fell modestly.
Despite news of a sharp decline in wholesale inflation in October, sellers took control in the bond market once again. Interest rates rose across the board, with the yield on the bellwether 30-year Treasury bond closing at 8.15%, up from 8.11% on Wednesday.
On Wall Street, the Dow industrial average lost 9.76 points to 3,821.99 as losers outnumbered winners by 13 to 8 on the New York Stock Exchange.
The bond market setback, which undercut stocks, suggested that bearishness runs deep among fixed-income investors--especially with the Federal Reserve Board expected to raise short-term rates for a sixth time this year when it meets next week.
After weeks of economic data indicating that inflationary pressures are building as the economy expands, traders apparently were unwilling Thursday to put much faith in the wholesale prices report, or to assume that it will deter the Fed from another credit-tightening move.
The Labor Department’s report of a 0.5% plunge in the producer price index in October initially surprised Wall Street analysts, who had expected a modest increase of about 0.2% in October.
However, excluding auto, energy and food prices, wholesale inflation would have increased 0.1%, roughly within expectations.
Also pressuring the bond market were reports that Wall Street dealers who had bought new three- and 10-year notes in Treasury auctions this week exploited the early rally to sell the securities and take profits.
In the stock market, the Dow shot up nearly 30 points in the morning after the inflation report. The rally then halted, however, as bond yields rose.
Some traders said it didn’t help the bond market that Texas Republican Bill Archer, incoming chairman of the House Ways and Means Committee, said he strongly favors cutting taxes. Investors fear that new tax cuts will cause the federal budget deficit to balloon again.
Among Thursday’s highlights:
* Technology stocks, which had rallied recently, gave back some of their gains. IBM fell 2 to 72, Texas Instruments dropped 1 3/4 to 77 and Adobe Systems lost 1 to 33 3/4. Semiconductor stocks were pressured by news of lower-than-expected industry orders in October.
* Genentech shares plunged after the biotech firm said it was the target of a widened government inquiry, then recovered amid speculation of a buyout by Roche Holdings, which holds 65% of the stock. Genentech was off 1 3/4 at 46 1/2 after falling as low as 43 1/8.
* Energy stocks dropped on concerns about falling oil prices. Chevron fell 5/8 to 41 7/8, Exxon dropped 3/4 to 59 1/2 and Unocal fell 5/8 to 27 3/4.
* In continuing fallout from Tuesday’s elections, many big drug stocks rose further on expectations that federal health care reform is dead. Merck gained 3/8 to 37 1/8, Pfizer added 3/8 to 76 1/2, Warner-Lambert rose 1/2 to 77 3/4 and Schering-Plough jumped 7/8 to 73 5/8.
* On the downside, some casino-related stocks dropped in the wake of voter rejection of gambling in some regions. Caesars World slid 2 1/8 to 39 3/4, Promus sank 1/2 to 30 and International Game Technology fell 5/8 to 18 1/4.
* Sears, Roebuck jumped 2 3/4 to 51 5/8 on news that it plans to divest its 80.1% stake in Allstate Corp. Allstate slipped 3/4 to 24 1/8.
* Among Southland issues, shares of troubled Conversion Industries, suspended on the Amex, resumed trading in the so-called third market and dove 1 1/16 to 5/16.
Stocks closed mostly lower in overseas trading. Tokyo’s 225-share Nikkei average ended off 159.03 points at 19,264.85.
In Europe, the Frankfurt DAX 30-share average closed at 2,082.40, down 14.07 points, while London’s Financial Times 100-share average gained 3.9 points to finish at 3,103.5.
In currency markets, the dollar finished higher against most major currencies for a second day, closing at 1.530 German marks in New York, up from 1.527 on Wednesday. But it eased to 97.78 Japanese yen from 97.81.
