Interest rate rise pushes Dow down 34 MARKETS

WALL STREET

July 07, 1993|By Bloomberg Business News

NEW YORK -- A rise in long-term interest rates drove stocks lower yesterday, as the market was buffeted by concern that surging commodity prices might signal a rising inflation rate and prompt the Federal Reserve to raise short-term rates.

Oil, telecommunications, computer, and food stocks paced the decline.

The Dow Jones industrial average closed down 34.04, at a session low of 3,449.93, extending Friday's 26.57-point drop on the heels of a dismal employment report. The average has fallen for five straight sessions amid a stream of bleak economic figures.

Yesterday's drop was triggered when the Commodity Research Bureau's index jumped to a 21-month high, driven by gains in soybean and grain prices. A rally in gold and oil prices added to the concern about inflation.

Traders said the spurt in commodity prices revived concern that the Federal Reserve, whose policy-making arm met yesterday, might vote to raise short-term interest rates to squelch inflation.

Yet traders dismissed such a scenario, saying the rise in commodity prices was due primarily to flooding along the Mississippi River boosting grain and soybean prices. In any event, they said, last week's economic reports suggest the recovery was too fragile to warrant higher rates.

"The Fed's not going to tighten," said Edward Laux, head trader at Kidder, Peabody & Co. "I don't think it's the inflation fear that people are worried about. This is just because the Mississippi River's overrun, and there could be some problems this year" with grain supplies.

Among broader market measures, Standard & Poor's 500 Index dropped 4.42, to 441.42, depressed by a plunge in Hewlett-Packard Co., which sank $5, to $75.50, after a SoundView Financial Group analyst reduced earnings estimates because of slowing printer sales.

The Dow Jones transportation average sagged 24.16, to 1,528.07, led by a decline in airline issues. The NASDAQ Combined Composite Index shed 2.27, to 702.22.

Declining common stocks outpaced advancing issues 4-to-3 on the New York Stock Exchange. Trading was moderate, with about 234 million shares changing hands on the Big Board.

After opening higher, stocks weakened steadily throughout the session. The decline accelerated in the early afternoon, when computer-guided sell orders began to bombard the market, according to Birinyi Associates. All told, computer-driven sell orders lopped about 32 points off the Dow industrials, said Philip Smyth, an analyst at Birinyi. "They were the big culprit," Mr. Smyth said.

"The low level of interest rates is the main thread holding this market together," said Eugene Peroni of Janney Montgomery & Scott Inc. When interest rates turned higher this afternoon, stocks backed off.

The yield on long-term Treasury bonds jumped after setting a record 6.625 percent overnight. The benchmark 30-year bond closed down 1/4 , at 105 21/32, to yield 6.68 percent, up 2 basis points.

Meantime, gold prices soared 1.5 percent yesterday, or $6.10, to $392.80 an ounce. And crude prices soared on the New York Mercantile Exchange as the prospects for an immediate resumption of Iraqi crude exports faded. West Texas Intermediate rose 31 cents, to $18.29 a barrel.

"The CRB index is up, and metals are screaming," said Richard Ciardullo, director of trading at Eagle Asset Management. "What's happened in the last couple of hours is a growing belief that the Federal Reserve, at the FOMC meeting, might vote to tighten credit," he said. "But I can't see the Fed tightening in the face of all the economic numbers."

What's more, the rise in bank and financial services stocks belies the perception that interest rates are headed higher, Mr. Ciardullo said. Citicorp rose 75 cents, to $30.875, MBNA Corp. climbed 25 cents, to $28.625, and Ambac Inc. added 25 cents, to $42.25.

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