FINANCIAL MARKETS : New Collapse in Budget Talks Riles Markets; Dow Slumps 50
Another breakdown in budget talks between President Clinton and Congress sparked a late sell-off in stock and bond markets Wednesday--a warning that investors are growing impatient with Washington.
The Dow industrial average, which had risen as much as 30 points early in the day in the wake of Tuesday’s interest rate cut by the Federal Reserve Board, began to slide in the final half-hour after Clinton disclosed no progress in talks aimed at producing a long-term balanced-budget plan.
The Dow ended with a loss of 50.57 points at 5,059.32 in heavy trading, egged on by computerized program selling.
The broad market didn’t fare as badly, though it was rapidly weakening in the final 30 minutes of trading after a strong early rally. Winners topped losers by 1,464 to 964 on the New York Stock Exchange, but most major stock indexes still ended lower.
Investors had begun the day on a positive note, reflecting the Fed’s decision Tuesday to trim its key overnight interest rate a quarter of a point--a long-awaited move that boosted Wall Street’s optimism about further gains for stock and bond markets in 1996.
The Dow, which had tumbled 101.52 points Monday on fears that the Fed might delay easing credit, rebounded 34.68 points Tuesday as bond yields plunged following the Fed’s announcement.
Yields continued to decline Wednesday, with the benchmark 30-year Treasury bond yield dropping to 6.08% at midday from 6.10% on Tuesday.
But Clinton’s announcement also caused the bond rally to stop, and the 30-year T-bond yield ended the day at 6.11%.
In addition, traders said the Treasury’s auction of $18.25 billion in two-year T-notes saw tepid demand. The average yield was 5.289%, slightly above estimates.
Very short-term yields, however, held at lower levels. The three-month T-bill yield slid to 5.17% from 5.23% on Tuesday.
Overall, analysts said investors’ disappointment was palpable after Clinton spoke. “It made everyone sober up,” said Todd Clark, a trader at Rodman & Renshaw.
Phil Schettewi, money manager at Loomis Sayles in Washington, said that despite the Fed’s rate cut Tuesday, “more rate cuts aren’t going to take place until there’s a resolution to the budget.”
Thus, analysts fear that Clinton and Congress are unwittingly daring investors to take some profits as the end of the year approaches and many portfolios remain up 25% or more for 1995.
Indeed, the heaviest selling Wednesday was in some of the classic consumer growth stocks that have performed best in recent months. Buyers, on the other hand, were mostly focusing on industrial and energy stocks that could perk up in 1996 if lower interest rates boost economic growth.
Among Wednesday’s highlights:
* Growth stocks closing sharply lower included Philip Morris, down 3 1/2 to 86 3/8; Coca-Cola, off 3 to 74 1/4; Procter & Gamble, off 1 1/2 to 82 5/8; Kellogg, down 2 to 76 1/8; and Pfizer, which fell 1 3/4 to 61 1/2.
* Some technology issues were also under pressure after Tuesday’s rebound. Microsoft, which rose as high as 91 3/8 on Wednesday, ended down 3 3/4 at 87 1/8.
Other tech losers included Compaq, down 1 1/2 to 47 5/8; Sun Microsystems, off 2 1/2 to 46 1/8; Micron Technology, down 2 3/8 to 43 1/4; and IBM, which lost 2 1/2 to 89 3/8.
On the upside, electronics giant Nokia rebounded 2 1/2 to 35 5/8, Xircom rose 1 3/8 to 11 3/8 and Pairgain Technologies surged 3 1/4 to 49 3/4.
* Industrial issues gaining ground included Ford, up 1/2 to 29 3/8; Kimberly-Clark, up 3/4 to 77 1/4; Olin, up 1 1/4 to 73 1/2; and fertilizer giant Potash, up 3 1/2 to 69.
* Airlines also had a relatively good day. Delta shot up 1 7/8 to 77, American Airlines parent AMR jumped 2 to 76 1/8 and Alaska Air added 1/2 to 17 3/4.
* In the energy area, Sonat rose 1/2 to 33 1/2, Tosco gained 7/8 to 37 3/8, Mobil jumped 1 3/8 to 110 3/4 and Schlumberger was up 1 1/2 to 69 3/4.
Natural gas prices surged again Wednesday and have risen 50% in the last month as abnormally cold weather has tightened supplies. The latest rally carried January natural gas futures up 20.3 cents to $3.071 per million British thermal units on the New York Merc.
In currency trading, the dollar eased when an overnight rally fizzled in the face of the budget stalemate in Washington.
Overseas, most major world stock markets posted hefty gains on the heels of Tuesday’s Fed rate cut. Tokyo’s Nikkei-225 index rose 1.6%, London’s FTSE-100 index jumped 1% and Frankfurt’s DAX index rose 1.2%.
