Monday's U.S. Markets: Bonds, Stocks Fall; Dollar Gains vs Euro
By By Willy Morris
Monday's U.S. Markets: Bonds, Stocks Fall; Dollar Gains vs Euro
New York, August 9 (Bloomberg) -- U.S. bonds fell, driving
yields to a 21-month high, as the government's planned sales of
$37 billion of new notes and bonds beginning tomorrow sapped
demand for existing Treasury debt.
Concern economic reports this week on retail sales and
producer prices might provide Federal Reserve officials with more
reasons to raise interest rates at their Aug. 24 policy meeting
also hurt government bonds.
''The mood is gloomy,'' said John Poole, who oversees $10
billion as head of fixed income at Mellon Private Asset
Management in Boston.
The 30-year Treasury fell 22/32, or $6.88 per $1,000 face
amount, to a price of 86 26/32. The yield rose 6 basis points to
6.23 percent -- the highest level since Nov. 4, 1997. Yields on
two-year notes, among the most sensitive to Fed rate policy, rose
9 basis points to a 20-month high of 5.77 percent.
The Nasdaq Composite Index dropped 28.99, or 1.1 percent, to
2518.98, and is now 12 percent below its July 16 record. The
Standard & Poor's 500 Index fell 2.49, or 0.2 percent, to
1297.80. The Dow Jones Industrial Average slid 6.33 to 10,707.70.
Three stocks fell for every two that rose on the New York Stock
Exchange.
The dollar traded at $1.0714 per euro, from $1.0742 late
Friday in New York. It rose as high as $1.0682 earlier, the
strongest against the euro since Wednesday. The dollar climbed to
its highest against the yen since Tuesday, trading at 115.21 yen
from 114.87 Friday, on speculation Japan may sell yen to keep the
currency's strengthening from impeding an economic recovery.
Bonds
Bonds suffered their biggest drop in almost three months
Friday after a government report showing greater-than-expected
gains in jobs and wages in July heightened talk of a Fed rate
increase this month. A report today showed sales at the nation's
wholesalers rose in June at their fastest clip in more than two
years.
So far this year, 30-year Treasuries have handed investors
losses of 11.9 percent, including price declines and interest.
Bonds due in more than a year have posted losses of 3.12 percent
-- the worst performance of the decade for that time period.
''It doesn't look pretty,'' said Randy Bateman, who manages
$1 billion of stocks and bonds at SunTrust Private Capital Group
in Orlando, Florida. Bateman has been buying Treasuries and
municipal bonds with varying maturities. That way, he'll always
have a pool of cash from maturing debt that he can reinvest at
higher rates should yields climb.
The government's planned sales of $37 billion of new notes
and bonds will also likely put pressure on government debt this
week, traders said. The Treasury will auction $15 billion of five-
year notes tomorrow, $12 billion of 10-year notes Wednesday and
$10 billion of 30-year bonds Thursday.
''Upcoming events will keep pressure on the bond market and
likely push the (30-year) yield toward 6.375 percent,'' said Tony
Crescenzi, head government trader at Miller, Tabak, Hirsch & Co.
''The most obvious reason to expect weakness is supply.''
Wall Street dealers required to bid on Treasuries at auction
often drive up yields before a sale to drum up demand for the new
securities.
Among other large planned sales, Cox Communications Inc.,
the No. 5 U.S. cable company, is selling $1.85 billion of bonds
this week. While investors have found room in their portfolios
for large debt sales by top-rated companies such as Cox, other
borrowers have delayed bond sales as a jump in interest rates and
slack demand boosted borrowing costs.
Compass Bank and Manila Electric Co. are among about a dozen
companies -- mostly junk rated -- that have canceled or delayed
sales totaling more than $2 billion in the past two weeks, while
other borrowers have been forced to offer wider yield premiums to
attract buyers.
By contrast, ''AA''-rated Wal-Mart Stores Inc., the world's
biggest retailer, found enough demand for a jumbo debt sale last
week that it boosted the size of its sale twice, to $5.75
billion.
Besides the planned sales, investors will focus on reports
this week that may point to economic strength and quickening
inflation, paving the way for a rate increase this month.
On Thursday, a Commerce Department report will probably show
July retail sales accelerated 0.4 percent after an 0.1 percent
rise in June, analysts said. Excluding autos, sales probably rose
0.4 percent in July, the same as June, analysts said.
A report Friday will likely show producer prices rose 0.3
percent in July, reflecting higher energy costs, after falling
0.1 percent in June, analysts said. Outside of food and energy,
the PPI probably increased 0.1 percent in July after dropping 0.2
percent in June, analysts said.
''People are recognizing that the economy isn't going to
slow down of its own accord,'' said Steve Casella, who invests
$600 million of bonds at Genoa Management Co. in Dallas. ''The
Fed is going to have to do its job,'' with a rate increase this
month.
Stocks
U.S. stocks fell, led by MCI WorldCom Inc., after the No. 2
long-distance company said it would cut evening rates, causing
concern that earnings will suffer. The Nasdaq declined for the
seventh time in eight sessions.
''The market is spooked that there will be another price war
between AT&T Corp., Sprint Corp. and MCI WorldCom in their
consumer long-distance business,'' said James Gribbell, a money
manager with David L. Babson & Co. in Cambridge, Massachusetts,
which invests $22 billion.
Some 675 million shares changed hands on the Big Board,
below the three-month daily average of 733 million. Repeating a
pattern begun last week, stocks rose early only to lose their
gains late in the day.
MCI WorldCom dropped 3 13/16 to 77 7/16 after the No. 2 long-
distance company said it will offer evening calls for 5 cents a
minute, copying a move by rival Sprint Corp. three weeks ago.
Analysts said the move could lead to a new round of price cuts in
the long-distance market. AT&T fell 13/16 to 50 7/8, and Sprint
lost 2 1/4 to 47 9/16.
''WorldCom is trying to maintain its volume and not run the
risk of losing any market share -- that's bad for image,'' said
Craig Ellis, who oversees the $85 million Orbitex Info-Tech and
Communications Fund. The price cut, though, ''raises questions
about'' its earnings, he said. Ellis last week pared his MCI
WorldCom holdings to 2 percent from 3.5 percent of his portfolio.
Data General Corp. rose 4 1/4 to 17 7/16, the biggest gain
in the S&P 500, after EMC Corp. agreed to buy the company for
$1.22 billion. The price represents a 48 percent premium to Data
General's close on Friday.
Acquiring Data General will help EMC compete against Hewlett-
Packard Co. and International Business Machines Corp. in the $10
billion market for mid-range storage systems. Hewlett-Packard
lost 3 5/16 to 107 11/16 and IBM fell 1 5/16 to 122 3/16. EMC
dropped 3 to 57.
While trading may be choppy until the Aug. 24 meeting of the
Federal Open Market Committee, an interest-rate increase isn't
likely to harm corporate earnings prospects over the next 12
months, said Sally Anderson, who helps oversee $3 billion at Kopp
Investment Advisers in Edina, Minnesota.
''We're on the way back'' from the economic problems that
threatened to undermine world financial markets last year,
Anderson said. ''As earnings continue to come in nicely, that
will set the stage for a rally by year-end.''
CIBC World Markets investment strategist Subodh Kumar
advised clients to boost their holdings of U.S. stocks because
stock prices already reflect the likelihood of higher interest
rates.
The S&P 500's decline to 1300.29 on Friday after a
government report showed an unexpected jump in new jobs and wages
''set an important low in the market,'' he said.
Investors should boost their holdings of U.S. stocks to 52
percent from 48 percent, and cut their cash holdings to 5 percent
from 9 percent, Kumar said. He kept his recommended weightings in
bonds at 38 percent and 5 percent in real estate.
He said he expects the index to reach 1375 by the end of the
year and to be at 1425 within 12 to 18 months from now.
Dollar
The dollar rose against the euro for a third day, after
Russian President Boris Yeltsin fired Prime Minister Sergei
Stepashin and his government.
The dollar ''is certainly benefiting from'' Yeltsin's move,
because of the close commercial ties between Russia and euro
nations, said John Hazelton, a trader at PNC Bank Corp. in
Pittsburgh. Traders sold the euro for dollars on concern a
lasting crisis might erode investor confidence in the euro
region.
The firing caused the ruble and Russian stocks to tumble.
Traders often buy dollars as a haven in times of international
turmoil in hopes the U.S. currency will retain its value.
The U.S. currency gained for the third straight day against
both the euro and yen. Against the yen in the last month, the
dollar has strengthened in only seven of 20 sessions.
Flagging U.S. bonds and stocks caused the dollar to
surrender much of its early gains, a pattern seen last week as
well.
Reports suggesting the U.S. economy is expanding fast enough
to accelerate inflation are sapping demand for bonds and stocks
and the dollars to pay for them.
With the European and Japanese economies showing signs of
rebounding, some investors are shifting assets into Japan and the
euro region.
''The market is focused on rate increases and a slowdown in
the U.S. economy,'' said Joe Cardello, chief proprietary trader
at Royal Bank of Canada in London. ''Now that you've seen a
correction in U.S. stocks and bonds and signs of growth in Europe
and Asia, money is moving into those sectors and out of the
U.S.''
Inflation hurts the value of bonds while higher rates
undermine stocks. Investors selling U.S. securities often convert
the dollar proceeds into other currencies.
Given prospects for a Federal Reserve rate increase in
coming months, ''you'd have to guess that U.S. asset markets will
come off a little bit more,'' benefiting the euro, said John
Bovenizer, head of foreign exchange at Norddeutsche Landesbank. |
