Dow Drops 132 as Hong Kong Market Recovers

Hong Kong stocks rebounded strongly Friday from their four-day free fall, but there was no celebration on Wall Street, where investors dumped big-company stocks for the second straight day.

The Dow Jones industrial average dropped 132.36, or 1.7%, to 7715.41 after a strong morning rally fell flat. That loss was on top of a 186-point tumble Thursday.

Especially hard hit in Friday’s selling were the shares of semiconductor companies. Investors reasoned that an economic slowdown in Asia would remove a key source of sales growth for the U.S. high-tech sector.

More voices joined a chorus saying the U.S. stock market has begun its most severe correction in several years.

“The wonderful party we’ve had may be over,” said Sung Won Sohn, chief economist at Norwest Corp.

Elsewhere around the globe, stocks were falling Friday, although in most places less steeply than the day before, when Hong Kong’s 10.4% plunge caused a worldwide rout.

Latin American markets suffered some of the worst losses Friday, with investors fearing that Asia’s woes would spread their way.

In Hong Kong, however, the relief was palpable when stocks recovered nearly half the ground they had lost in a week of panic selling triggered by a currency crisis.

A crowd of small investors clustered around a bank’s market monitor gave a quiet, relieved cheer as the Hang Seng index closed at 11,144.34--up 718.04 points, or 6.89%.

It was a small reassurance after the week’s unrestrained drop that lopped off a quarter of the market’s value at the lowest point.

Chief Executive Tung Chee-hwa applauded his government’s decisive defense of the Hong Kong dollar, which had come under attack by speculators probing for weakness after three months of currency chaos in the rest of the region.

“Speculators saw what happened in other currencies in Southeast Asia, and they thought they wanted to have a go here. But we will make sure they will not succeed,” said Tung on Friday on his return from an official visit to London. “We’re determined to maintain this exchange rate, and it’s already having its effect.”

Speculators appear to have backed off for the moment, and the Hong Kong dollar even strengthened Friday.

But analysts warn that the crisis is not over yet.

“One should not drop one’s guard,” said Michael Green, an analyst at Salomon Bros. Hong Kong Ltd. “There’s considerable financial warfare out there. The government has counterattacked, but there could be a second wave.”

The market turmoil is the first major crisis that the new Hong Kong government has confronted since coming under Chinese rule July 1, and the territory’s leaders were at pains to tell their sovereigns, as well as the speculators, who was in control.

Dai Xianglong, China’s central bank governor, said the Chinese government will help Hong Kong if asked--China holds $134 billion in foreign reserves--but kept out of the way.

“From the Chinese side, we will follow the situation very calmly,” he told a Hong Kong newspaper. “I have full confidence in the stability of the Hong Kong dollar.”

Some currency-market observers believe that the Chinese had actively intervened to bolster stock prices, but that could not be confirmed.

Hong Kong’s rebound was far from contagious. Among stock markets in other Far Eastern and Southeast Asian countries--the latter’s currency woes inspired the assault on the Hong Kong dollar--Indonesia, Malaysia, South Korea, Taiwan and Thailand all showed losses again Friday, with only the Philippines making a recovery.

In Tokyo, the results were mixed. The benchmark Nikkei 225 stock average rose 212.19 points, or 1.24%, to 17,363.74. The Topix index of all shares on the first section of the Tokyo Stock Exchange fell 4.19 points, or 0.31%, to 1331.69.

European stocks were generally down as well.

In London, stocks fell for a third day, erasing early gains. Germany’s benchmark index of large stocks was up a mere 0.13% after reversing a strong start. France’s key index was down slightly on the day, but down 3.69% for the week and at its lowest level since Sept. 12.

There was heavy damage in Latin American stock markets Friday. Mexico’s Bolsa index plummeted 240.46, or 4.54%, to a five-week low of 5058.73--its largest one-day slide since dropping 6.8% on Feb. 27, 1995.

Brazilian stocks plunged 8.2% in the second-biggest drop this year, and Argentine stocks had their worst daily loss of the year, 4.88%.

To some U.S. observers, it adds up to a gloomy near-term outlook for stocks in general.

Michael Metz, the bearish chief equity strategist at Oppenheimer & Co., told clients to sell stocks and buy bonds in preparation for a recession next year. Stocks, he said, should make up no more than 25% of an investor’s holdings.

Norwest’s Sohn said the correction could reach 15%. With the Dow at 6.6% below its Aug. 11 peak of 8259.31, that would imply a further drop to nearly the 7000 level.

Such a fall would be the worst in years. The steepest corrections recently have been dips of about 10% last spring and in the summer of 1996. Both times, the market quickly recovered and surged to new highs.

According to Sohn, it has long been clear that U.S. stocks were overvalued and that any kind of push would send them downhill.

“We’ve been way overdue for a correction in this market,” said Charles Crane, chief market strategist for Key Asset Management. “The accumulation of bad news could weigh against stocks for some time to come.”

Some of the worst news Friday came in the semiconductor industry, when Intel Corp., the world’s largest manufacturer of semiconductors, said it will postpone construction of a $1.3-billion factory in Texas because of flagging demand for the computer chips.

That the announcement came in the midst of the Southeast Asian turmoil was a coincidence, but investors Friday were “connecting the dots,” Crane said.

Intel stock fell $1.88 to $80 Friday in trading on the Nasdaq stock market. Since hitting a high of $100.50 on Aug. 20, the widely held stock has lost 20% of its value, basically peeling away all its gains since last January.

And Intel was far from the worst victim of Friday’s sell-off. Chip maker Applied Materials Inc. plunged 10%, Texas Instruments Inc. lost 8%, and Novellus Systems Inc. fell 6%.

“We’ve seen a year’s worth of gains wiped out in four trading days,” said technology analyst Duane Eatherly of Banc One Investment Advisors. “This is very, very ugly.”

Mulligan reported from New York City and Farley from Hong Kong. Reuters and Bloomberg News also contributed to this report.