Europe's money turmoil buoys stocks

WALL STREET

August 03, 1993|By Bloomberg Business News

NEW YORK -- U.S. stocks rebounded yesterday amid expectations that the breakdown of Europe's exchange-rate system would lead to lower interest rates in Europe and gradually spur demand for U.S. exports there, traders and analysts said.

"My sense is if European central banks have the freedom to lower rates, that can't be anything but beneficial to U.S.-based multinational corporations," said Thomas McManus, associate strategist in U.S. equities at Morgan Stanley.

The Dow Jones industrial average rose 21.52, to 3,560.99, after rising as high as 3,562.39. On Friday, the average shed 27.95 points. United Technologies Corp., Minnesota Mining & Manufacturing and Caterpillar Inc. led the rebound.

Among broader market indexes, the Standard & Poor's 500 Index gained 2.02, to 450.15, recouping Friday's 2.11-point slide. The Nasdaq Combined Composite Index added 2.96, to 707.66, bouncing back from a 2.54-point drop on Friday.

Advancing stocks outpaced decliners 5-to-3 on the New York Stock Exchange. Trading was moderate, with about 230 million shares changing hands on the Big Board.

European Community leaders agreed over the weekend to effectively dismantle the EC's exchange rate mechanism (ERM) by widening permissible trading ranges for EC currencies.

The de facto collapse of the ERM gave member countries freedom to lower interest rates, which had been kept artificially high to keep currencies within the narrow bands the ERM dictated. High interest rates, in turn, have choked off economic growth in Europe.

"There's a little bit of euphoria on interest rates coming down in Europe," said Peter DaPuzzo, senior managing director at Cantor, Fitzgerald & Co. "There's no pressure on interest rates to higher here if they're going lower there."

The gain in the U.S. mirrored advances overseas. Stock markets in France and Britain jumped for a second straight session after EC leaders agreed to effectively disband the exchange-rate system. France's CAC 40 Index soared 43.15, to close at 2,129.03, and Britain's FT-SE 100 Index gained 15.20, to finish at 2,941.70.

Stocks also received a boost from yesterday's economic news, which lent credence to the notion of an improving economy, traders said.

The National Association of Purchasing Managers said its index of manufacturing conditions advanced to 49.5 in July, from 48.3 in June. The index did better than economists' forecast of a decline to 47.9. A reading below 50, however, still indicates contraction in the manufacturing sector of the economy.

"There's a sense that people think this number is finding a bottom," said Mr. McManus.

Also yesterday morning, the Commerce Department said construction spending in June rose 1.2 percent, after rising a revised 1.1 percent in May. The initial May figure was 0.5 percent. Economists had forecast a 0.5 percent rise in spending.

Moreover, "earnings coming through have been pretty good" for the second quarter, said Don Hays, chief investment strategist at Wheat First, Butcher & Singer. "We're continuing to see mutual fund cash pour in" to equities, Mr. Hays said.

Autos, semiconductors, miscellaneous financial and general retail stores paced the gain in the S&P 500. Electric utilities, gold, domestic oil, and publishing stocks were down the most.

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