Stocks Stumble as Bond Rates, Gold Jump
Blue-chip stocks ended with losses Thursday as worries about a U.S. default sparked a jump in long-term bond interest rates and a surge in gold prices.
A few disappointing earnings reports also rattled traders, who have recently begun betting that 1996 profits will beat forecasts.
The Dow Jones industrial average closed 26.01 points lower at 5,216.83, a day after setting a record high of 5,242.84. Broad indexes ended mostly lower. Declining issues led advancers on the New York Stock Exchange, 1,263 points to 1,021.
Analysts said the threat of a debt default had a ripple effect, sparking a sharp rise in the inflation sensitive Treasury bond yield and gold prices, which in turn, sparked a rally in the shares of gold mining companies.
They said Wall Street revisited the default issue after major rating agency Moody’s Investors Service said late Wednesday that it was reviewing $387 billion in U.S. debt for possible downgrade.
“We need positive action to avert a third government shutdown,” said Robert Stovall, president of Stovall/21st.
He said gold will continue to benefit “if this game of chicken went so far that they lost all their feathers.”
On New York’s Commodity Exchange, February gold closed up $3.20 at $406.70 an ounce, its highest level in 2 1/2 years.
Trading was heavy as an estimated 120,000 gold contracts changed hands, up from Wednesday’s 59,985.
Among the gold mining companies, Newmont Mining rose 1 1/8 to 55 5/8, Newmont Gold added 1 1/2 to 55 and ASA Ltd. was up 1 1/8 at 46.
In the bond market, the Treasury’s benchmark 30-year bond yield rose to 6.11% from 6.03% Wednesday.
“It would be unprecedented and bull-headed to default. We would have to live with [the ramifications] for years,” Stovall said.
Douglas Cliggott, a senior investment strategist at Merrill Lynch, said foreign investors were shying from the remote prospect of a government default.
“The foreign buyer has more flexibility [than U.S. participants] to turn away from the U.S. market when risk is perceived to be rising,” he said.
Bonds yields rose despite further signs of a detente in the budget war, and on the release Thursday of soft economic data on home sales and unemployment, which raised expectations for further declines in interest rates.
The White House said it expected to avert another partial shutdown of the government. Temporary funding for several departments and agencies expires today.
James Pizzo, senior portfolio strategist at Oppenheimer & Co., downplayed the budget battle’s effect on Wall Street.
“The stock market’s drop is more indicative of the run-up we’ve had, especially in the Dow stocks,” he said. “Bond [prices] are down more on internal factors like hedge fund selling in two- and five-year Treasury notes.”
Among market highlights:
* Among individual issues, Hasbro soared 10 1/8 to 40 3/4 after receiving an unsolicited $5.2 billion bid from rival Mattel lost 1/2 to 31 1/2.
* Southwest Airlines rose 2 1/4 to 25 1/8 after reporting strong fourth-quarter earnings.
* Coca-Cola fell 1 1/2 to 73 5/8 after reporting disappointing sales in Latin America.
* AT&T; lost 7/8 to 64 3/8, after the telephone company reported fourth-quarter profit before special charges of 94 cents a share, in line with analysts’ expectations.
* Several initial public offerings drew interest. World Color, the nation’s third-largest commercial printer, rose 5/8 to 19 5/8. ESC Medical Systems, an Israeli medical devices maker, surged 12 to 27.
* Loewen Group tumbled 5 11/16 to 18 5/8 after a Mississippi court Wednesday ordered it to post a $625-million bond by Jan. 31 so it can appeal a November jury award of $500 million against it. Loewen said the move might force it to seek bankruptcy protection.
At the New York Mercantile Exchange, oil futures ended sharply lower Thursday, with heating oil prices hitting three-month lows on forecasts for easing cold.
“Heating oil prices have been particularly pressured,” Dean Witter Vice President Alan Levine said. “The onset of warmer weather in the Northeast has stopped a bull market in its tracks and a new high seems quite unlikely now.”
March crude ended down 61 cents at $17.67 a barrel. February heating oil closed down 2.21 cents at 50.51 cents a gallon, and February gasoline fell 1.53 cents to 52.67 cents.
