Stocks dive as euphoria over German rate cuts fades Investors conclude revival not assured

September 16, 1992|By New York Times News Service

One day after Germany's central bank grudgingly nudged its interest rates down, financial markets across Europe and in the United States fell yesterday as investors concluded that the Bundesbank by itself could not foster economic recovery or ease currency strains.

The widespread declines in stock prices wiped out much of Monday's gains. Despite the German rate cuts, key currencies like the British pound tumbled relative to the German mark, and the Italian central bank was forced to intervene to support the lira just two days after it was devalued by 7 percent.

In American stock trading, the Dow Jones industrial average, which had jumped 2.1 percent Monday, lost 1.4 percent yesterday, ending at 3,327.32, off 48.90 and consuming more than two-thirds of Monday's 70.52-point gain, the year's largest.

The United States bond market also reversed direction yesterday, selling off even after a favorable inflation report and downcast retail sales figures, the sort of news that normally supports bond prices.

"Sometimes when you get in the store, it isn't as good as it looks in the window," said Byron R. Wien, an investment strategist at Morgan Stanley. "Now everybody's worried that the Germans just cut rates for appeasement as opposed to a fundamental change in policy."

While the Bundesbank's action Monday was seen across Europe as a step in the right direction, economists said that yesterday's market reaction suggested just how ill-equipped and reluctant the institution was to play the part increasingly being thrust upon it: central banker and monetary policy maker for the European Community.

"This is not a role the Bundesbank wants," said Axel Siedenberg, an economist at Deutsche Bank AG in Frankfurt. Its "policy is to be the German central bank, and it is written into the law that its role is price stability in Germany."

With France set to vote Sunday on whether to proceed with the next phase of European unification, analysts said the markets were as jittery as they had been before the German move, and that further economic jolts, like a rise in British interest rates or a further devaluation of the lira, are possible.

Once yesterday, the pound fell to 2.78 marks, its lowest point since Britain joined the European Exchange Rate Mechanism two years ago. It rebounded slightly, but remained in danger of falling below 2.778, the level at which the government would be obliged to intervene by buying the currency or to raise interest rates. Britain repeatedly has ruled out devaluing the pound.

The lira, despite having been devalued Sunday, fell sharply yesterday against the mark, forcing the Bank of Italy to intervene at least twice. Analysts said the lira was almost certain to remain under pressure for the rest of the week.

In London, stock prices dived, with the Financial Times-Stock Exchange index falling 2.1 percent, wiping out Monday's gain.

Share prices in Paris, Frankfurt and other European exchanges fell, with the biggest drop in Paris, where the CAC-40 index fell 2 percent.

"The reaction in the markets has been that the Bundesbank failed to achieve the good of relieving the immediate tensions in the exchange-rate mechanism and it did the harm of undermining its own anti-inflation credibility," said Ian Harnett, an economist at Societe Generale Strauss Turnbull Securities in London.

In agreeing to a very limited rate reduction, economists said, the Bundesbank tried halfheartedly, and apparently failed, to convince markets it could be counted on to act in the interests of Europe as a whole without compromising its domestic role of guiding the German economy through the difficulties of unifying East and West Germany.

"The Bundesbank is carrying the burden of dealing with irresponsible fiscal policies and huge transfers to the east at home, and at the same time is expected to carry a growing international responsibility," said Richard Portes, the director of the Center for Economic Policy Research in London. "It's not feasible."

The decline on the American market yesterday confounded some hopes that the Dow would soar out of

the 3,250 to 3,400 range where it has lingered much of the year.

"This is not new territory," said Richard B. Hoey, portfolio manager of the Dreyfus Growth and Income Fund. "But previously, we passed through it in a calmer way."

New York Stock Exchange volume was a moderately heavy 211.9 million shares, down from Monday's 252.8 million shares.

The broader market reversed almost all of its gains, with the Standard & Poor's 500 falling 5.50 points, or 1.29 percent, to 419.77, from the record level reached on Monday.

While cyclical stocks -- the makers of autos and industrial equipment that depend on a brisk recovery -- led the market up on Monday, the defensive consumer goods stocks led it back down. Drug, food and diversified health care stocks accounted for almost a fifth of the S&P 500's decline. Merck and Procter & Gamble each fell more than a point, more than they gained Monday.

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