Rumors Make Bad Week Worse on Wall Street
Stocks and bonds extended a dismal week Friday, as investors became increasingly certain that the Federal Reserve will raise interest rates to slow the U.S. economy.
Rumors of trouble at a major hedge fund also shook markets.
The yield on the bellwether 30-year Treasury bond shot up to 6.16% from 6.06% on Thursday, reaching the highest level since November 1997, in the wake of fresh data pointing to economic strength. The yield was 5.97% just a week ago.
The Dow Jones industrial average dropped 130.76 points, or 1.2%, to close at 10,490.51. The blue-chip index lost 309.33 points, or 2.9%, for the week.
Broader stock indicators also fell Friday, with the Nasdaq composite losing 1.5% and the Standard & Poor’s 500 down 0.7%. Trading volume, however, was modest.
A pair of rumors swept through markets Friday. First, word spread that the Federal Reserve had convened a special, early meeting to debate an interest rate increase.
Some traders also cited a rumor that Tiger Management, a hedge fund, was about to fail and was seeking help from the Fed. That triggered memories of the near-failure of hedge fund Long-Term Capital Management in September.
A Fed spokesman declined to comment, but traders said both rumors were quickly refuted.
A Tiger Management spokesman said, “Tiger is in a highly liquid position. It has enough cash on hand to pay out its redemptions fourfold.” He said talk that the Fed was holding a special meeting about the fund was “absurd.”
Still, the bond market failed to recover.
“We’re at such a tenuous level in the marketplace that rumors were all it took,” said Arthur Hogan, market analyst at brokerage Jefferies & Co.
The latest signs of economic strength Friday--despite a report showing relatively tame inflation--helped convince some market watchers that the Fed, which is scheduled to meet June 29 and 30, may raise its benchmark short-term rate more than the one-quarter percentage point that most already anticipate.
The Fed’s key rate, the federal funds rate or overnight loan rate among banks, is now at 4.75%. It was reduced from 5.5% in three steps last fall, amid global market turmoil following Russia’s currency devaluation.
“The Fed could conceivably take back all three of its rate cuts from last year,” said David M. Jones, chief economist at Aubrey G. Lanston & Co. in New York. “People began to speculate about multiple rate hikes, and that was too much for the stock market to take.”
Losers topped winners by 17 to 13 on the New York Stock Exchange. But trading volume was under 700 million shares, continuing the depressed pace of recent weeks. The lack of volume suggests that sellers, so far, have little conviction.
Among Friday’s highlights:
* Internet shares were mostly lower, as rising interest rates continue to take their toll on many of the market’s highest-valued stocks. America Online sank $6 to $99.50 and Amazon.com slid $10.13 to $105.81.
Also, CMGI tumbled $11.75 to $89.75 after the Internet holding company announced higher-than-expected third-quarter losses.
EBay, the online auctioneer, plunged $16.81 to $165.88 after its system crashed, forcing it to halt operations.
Still, two new Internet stocks rose on their first day of trading. Phone.com surged $24.13 to $40.13, while Onlinetrading.com gained $2.88 to $9.88.
* Many big-name growth stocks fell, including Hewlett-Packard, off $4.63 to $88.38; Procter & Gamble, down $3 to $86.25; and Pfizer, down $2.06 to $97.50. But GE rose 34 cents to $101.34.
* Most brokerage stocks were lower. Charles Schwab fell $4 to $94.25, while Morgan Stanley Dean Witter gave up $1.63 to $86.75.
Overseas, Japan’s Nikkei stock average added 0.6%, continuing to gain in the wake of the government’s surprisingly strong economic growth report this week.
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Producer Prices Edge Higher
The April spike in U.S. wholesale prices smoothed out in May, rising only 0.2%. But retail sales boomed, heightening fears of interest rate hikes. See story on C2.
Index of seasonally adjusted finished-goods prices, 1982=100.
May: 132.4
Source: Bureau of Labor Statistics *
Market Roundup, C4
