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Global Markets Suffer A Hit
Specialist Joe Talento works on the trading floor of the New York Stock Exchange yesterday.
(By Richard Drew -- Associated Press)
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The Fed's benchmark rate influences other borrowing costs throughout the economy, particularly short-term rates such as the prime rate for businesses, adjustable rates on mortgages and credit card rates. But U.S. long-term rates, such as those for fixed-rate mortgages, are determined by worldwide financial markets and have dropped in the past week as investors have pulled money out of stocks and commodities and parked them in the safer haven of U.S. Treasury securities.
"There's been a flight to quality out of stocks and risky assets and into primarily Treasurys, but also corporate bonds have held up pretty well," said James C. Cusser, who manages two bond funds for Waddell & Reed Inc.
The flood of cash into Treasurys has pushed up prices, causing yields (which move inversely) to fall. The yield on the 10-year Treasury bond, a benchmark for 30-year mortgages, fell yesterday to 5 percent. The rate on a 30-year, fixed-rate mortgage fell to 6.62 percent this week from 6.67 percent last week, Freddie Mac said yesterday.
The extra demand for Treasurys has also bolstered the value of the dollar, causing big losses for many hedge funds that had been betting both that emerging market asset prices would keep climbing and that Treasury prices and the dollar would go down, traders said.
Market analysts and economists predicted that equity investors should prepare for more volatility, although they sharply disagreed about where the markets will go next. The Dow and the S&P 500 are each down more than 5 percent since their highs in early May.
Citigroup economist Steven Wieting is optimistic: "We have faced some excesses in risk-taking in emerging markets and commodities . . . but is there any reason to believe the U.S. is at the end of its rope? No."
But Bob Doll, president of Merrill Lynch Investment Managers, said he thinks investors have only seen the first half of a 10 percent correction. Yesterday's recovery "is just another rally attempt in the middle of a correction," he said. And Elizabeth Weymouth, global investment specialist for the J.P. Morgan Private Bank, said she is telling clients to expect another drop: "We don't think this is necessarily the dip we've been waiting for."
Staff researcher Richard Drezen contributed to this report. Masters reported from New York.
Movers
Intel fell 28 cents, to $17.11. Analysts said a price war with Advanced Micro Devices could cut into profits.
Advanced Micro Devices fell 97 cents, to $27.03.
McDonald's rose 37 cents, to $33.69.
General Motors fell 16 cents, to $24.83.
Indexes
New York Stock Exchange composite index fell 44.57, to 7992.49.
American Stock Exchange index fell 15.93, to 1894.41.
Russell 2000 index of smaller-company stocks fell 0.25, to 706.53.
Volume
NYSE: 3.65 billion shares, up from 2.68 billion on Wednesday. Decliners outnumbered advancers 4 to 3.
Nasdaq: 3.01 billion shares, up from 1.95 billion. Decliners outnumbered advancers 3 to 2.
Commodities
Crude oil for July delivery: $70.35, down 47 cents.
Gold for current delivery: $609.10 a troy ounce, down from $627.40 on Wednesday.
