News Article
BusinessWeek.com
June 27, 2006
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Stocks Fall as Fed Meeting Looms

Worries about a larger rate hike pushed the indexes down. Also in focus: reports on June consumer confidence and May existing home sales

Stocks finished sharply lower Tuesday, giving back the previous session's gains as investors grew skittish ahead of the Thursday's Federal Reserve decision on interest rates. The perceived risk of a larger-than-expected hike fanned concerns, and declines in Treasury yields from multi-year highs failed to aid equities, says Standard & Poor's Equity Research.

The Dow Jones industrial average fell 120.54 points, or 1.09%, to 10,924.74, despite a 1% gain by Exxon Mobil (XOM ). The broader Standard & Poor's 500 index shed 11.37 points, or 0.91%, to 1,239.19. The tech-heavy Nasdaq composite declined 33.42 points, or 1.57%, to 2,100.25.

NYSE breadth was decidedly negative, with 24 issues declining for every 9 advancing, while Nasdaq breadth was 23-8 negative.

High bond yields could limit stock gains in 2006, some analysts say. "Based on past historical relationships, a 10-year yield at 4.4%, where we started the year, would be associated with a target for the S&P 500 of 1,500," says Henry McVey, chief U.S. investment strategist at Morgan Stanley. "A 10-year yield of 5.25% would lower the target to 1,380, and a yield of 5.5% would bring it down to 1,340. In addition to this source of valuation pressure, we are somewhat less optimistic on the outlook for growth in the second half."

Investors were weighing modestly better than anticipated economic data Tuesday. Consumer confidence rose unexpectedly to 105.7 in June. Separately, existing home sales declined 1.2% to 6.67 million in May, in line with a gradually cooling housing market, says Action Economics.

The economic docket is quiet Wednesday. The Fed will kick off its meeting, but central bankers aren't set to unveil their next interest-rate move until Thursday. The Fed is widely expected to raise rates 25 basis points, though there has been speculation of a 50-basis-point hike (see BusinessWeek.com, 6/27/06, "Is a Fed Surprise on Tap?").

On the company side, M&A activity remained in focus Tuesday. Spanish-language broadcaster Univision (UVN ) was higher after the company's board agreed to a $12.3 billion ($36.25 cash per share) takeover bid from a consortium of investors.

In technology, Intel (INTC ) was lower after the semiconductor company sold its communications-chips unit to Marvell Technology Group (MRVL ), which has made chips for the BlackBerry (RIMM ) and Treo (PALM ) handheld devices. Shares in Marvell fell sharply.

Among other stocks in the news, General Motors (GM) was lower after the automaker said it was reviving its zero-percent financing sales incentive. Earlier, shares rose on reports that about 47,600 workers have decided to leave the automaker and auto-parts supplier Delphi through buyouts or early retirement.

Fellow Dow member DuPont (DD ) was lower after Vivendi sold its entire stake in the chemical company for $671 million.

Elsewhere, Goodyear Tire & Rubber (GT) was down following a report that Tokyo-based rival Bridgestone guided its earnings lower by 35% and said its annual profit may fall for the first year in five.

Shares in Nortel Networks (NT ) dipped on news the telecommunications equipment maker will cut 1,100 and change pension programs to reduce costs.

In earnings news, shoe giant Nike (NKE ) is set to report quarterly results after the close.

In the energy markets, August West Texas Intermediate crude oil futures closed up 12 cents at $71.92 a barrel ahead of a weekly inventory report Wednesday.

European markets finished lower. In London, the Financial Times-Stock Exchange 100 index fell 28.9 points, or 0.51%, to 5,652.3. Germany's DAX index dropped 55.48 points, or 1.01%, to 5,459.15. In Paris, the CAC 40 index was down 30.25 points, or 0.63%, to 4,771.24.

Asian markets finished mixed. Japan's Nikkei 225 index rose 19.41 points, or 0.13%, to 15,171.81. In Hong Kong, the Hang Seng index slipped 30.11 points, or 0.19%, to 15,774.7. Korea's Kospi index added 9.49 points, or 0.77%, to 1,247.54.

Treasury Market

Treasury yields declined after the dip in existing home sales. The 10-year note rose in price to 99-11/32 for a yield of 5.21%, while the 30-year bond climbed to 88-30/32 for a yield of 5.24%. The Treasury curve remained inverted, with the yield on the 2-year note topping the 10-year by 3 basis points. An inverted yield curve is taken by some forecasters as a sign of impending recession.