8/23/99 Monday's U.S. Markets: Stocks, Dollar Rise; Treasuries Steady
By Willy Morris
New York, Aug. 23 (Bloomberg) -- The Dow Jones Industrial
Average rose to a record as stocks rallied for a second day on
optimism the Federal Reserve won't boost interest rates beyond
the quarter percentage point expected at tomorrow's policy
meeting. J.P. Morgan & Co. led the average's advance.
''Stocks are gaining as fear of higher and higher interest
rates is waning,'' said Howard Kornblue, a money manager for
Phoenix-based Pilgrim Capital Corp., which oversees $7.4 billion.
''People are anticipating we'll get a rate hike but not another
one soon.''
The Dow average rose 199.15, or 1.8 percent, to 11,299.76,
its first record close since July 16. The Standard & Poor's 500
Index gained 23.61, or 1.8 percent, to 1360.22, led by computer-
related and drug shares including Microsoft Corp. and Pfizer Inc.
The Nasdaq Composite Index climbed 71.24, or 2.7 percent, to
2719.57. Seventeen stocks rose for every 13 that fell on the New
York Stock Exchange.
The dollar strengthened to its best rate in a week, at
$1.0477 per euro from $1.0672 late Friday in New York. Its gains
accelerated after reaching $1.0550, where it triggered automatic
buy orders traders place to protect themselves when a currency
moves contrary to their expectations. The dollar rose against the
yen for the first day in six, gaining to 111.64 yen from 111.29.
The 30-year bond rose 3/32, or 94 cents per $1,000 face
amount, to a price of 102. Its yield fell 1 basis point to 5.98
percent, the lowest level since July 22. Yields on two-year notes
rose 2 basis points to 5.65 percent.
Stocks
Computer-related stocks gained as investors became more
confident the Fed won't raise rates after tomorrow. A series of
increases would reduce the amount investors are willing to pay
for the future earnings of fast-growing companies in the
technology and telecommunications industries.
Microsoft, the No. 1 software maker, rose 3 1/16 to 86 7/16.
J.P. Morgan analyst William Epifanio said the stock could reach
120 in the next 12 months. Epifanio raised his earnings forecast
for the fiscal second quarter ending Dec. 31 to 40 cents a share
from 38 cents and boosted his fiscal 2000 estimate. Epifanio
reiterated his ''buy'' rating.
International Business Machines Corp., the world's biggest
computer maker, rose 2 3/4 to 124 1/2.
''If we get a 25-basis-point hike and the Fed maintains its
neutral stance, we should see a little more vigorous rally in
growth stocks,'' said Barry Hyman, a senior market analyst at
Ehrenkrantz King Nussbaum.
Financial stocks are also sensitive to higher rates because
they deter borrowing and reduce the value of bond portfolios. The
yield on the benchmark 30-year Treasury bond was unchanged at
5.99 percent, matching a four-week low reached Wednesday.
J.P. Morgan, the No. 4 U.S. bank, gained 6 5/8 to 139 9/16.
Citigroup Inc., the largest U.S. financial-services firm, rose 2
1/8 to 48 7/16, and American Express Co. gained 3 1/2 to 146 3/8.
Drug stocks gained for a third day. Merck & Co. rose 2 3/8
to 70, Pfizer climbed 1 11/16 to 38 5/8 and Schering-Plough Corp.
gained 2 1/2 to 54 3/16.
''Drug stocks have been a lackluster performing group this
year, and now people seem more comfortable with them'' at these
valuations, said Kornblue.
The S&P Drug Index had fallen 8 percent this year and is the
18th worst performing among the S&P 500's 89 industry groups.
The Federal Open Market Committee meets tomorrow to decide
on the direction of interest rates. A Bloomberg News survey of
banks and securities firms that trade directly with the Fed shows
29 out of 30 expect a quarter-point increase in the target rate
for overnight loans between banks to 5.25 percent. The central
bank last raised the target in June.
Some 679 million shares changed hands on the Big Board,
below the three-month daily average of 724 million. The S&P 500
is still 4.2 percent below its record close while the Nasdaq is
5.3 percent from its closing high. Both were set July 16.
Dollar
The dollar registered its biggest gain against the euro in
three months and rose against the yen as the rally in U.S. stocks
generated foreign demand for the dollars needed to buy them.
''The dollar can carry on gaining into tomorrow,'' said
Jeffrey Yu, a trader at Sanwa Bank. ''The market anticipates a
good outcome from the Fed that would put the U.S. economy on a
better track'' to keep growing without inflation taking root.
A single rate increase for the remainder of the year could
be the best possible outcome for the dollar, said Yu. It's not
too much to sour investors on U.S. stocks and bonds, and at the
same time adds to the money-market return on dollar-denominated
deposits.
Three-month dollar deposits already yield 2.80 percentage
points more than those denominated in euros and 5.40 percentage
points more than yen deposits.
''The dollar may rally,'' said Steve Hatton, chief analyst
at Currency Management Corp. in Hartford, England, which trades
about $20 billion a month with customers on the Internet. He said
he's already seeing customers ''buying back (dollars) on the
likelihood that the Fed won't surprise the markets.''
A report last week showing tame consumer prices convinced
many investors the Fed won't need to impose a series of rate
increases to slow the nine-year U.S. economic expansion. That's a
relief for U.S. companies, which could see their earnings hurt by
higher borrowing costs, and boosted the Dow Jones Industrial
Average 1 percent, adding to Friday's gain of 1.25 percent.
''The assumption is the Fed will tighten a quarter-point,
but that is something the market can digest,'' said Bob Lynch, a
currency strategist at Paribas Corp. ''The dollar has room to go
to $1.0550'' per euro.
Bonds
U.S. bonds may chip away at first-half losses in coming
weeks after tomorrow's expected interest-rate increase by the
Fed. Treasury yields were little changed today at a one-month
low.
Bonds fell two of the last three times the Fed raised rates.
In the most recent increase on June 30, though, Treasuries rose
because the central bank signaled it might not need to boost
rates further. Many investors expect the same outcome tomorrow.
''The economy is finally showing some signs of moderating,
and that should keep the Fed on the sidelines after tomorrow,''
said Roger Early, who manages $2.5 billion of debt at Delaware
Investments in Philadelphia. ''That should be good for bonds.''
Early bought Treasuries maturing in 10 to 30 years over the past
six weeks.
Economic growth slowed to an annual pace of 2.3 percent in
the second quarter compared to 4.3 percent in the first. That,
combined with a 2.1 percent inflation rate in the 12 months
through July, may keep the Fed from raising rates beyond
tomorrow's expected increase.
In March 1997, bonds initially dropped after the Fed raised
rates, only to recover within weeks and then rally as
expectations grew that there would be no further increases.
Bonds rose in the week prior to a rate increase in February
1995, in what turned out to be the last of seven rate increases.
The rally picked up steam as confidence grew that the Fed was
done, resulting in gains of 35 percent for that year, including
price increases and interest.
Treasuries had their first winning week in more than a month
last week on optimism the Fed won't carry out a series of rate
increases. Still, benchmark bonds are down 8.9 percent so far
this year.
Federal funds futures contracts, which signal where people
expect the fed funds target to be in the weeks and months ahead,
suggest investors are prepared for a 25-basis-point increase
tomorrow.
The contract for December delivery carries an implied yield
of 5.38 percent. That's down from as high as 5.49 percent earlier
in the month -- a sign that fewer investors expect more than one
quarter-point rate rise for the rest of the year. |
