Sun, Jun 10, 2007 page10

• Wall Street exuberance suffers setback

  INVESTORS ROILED Worries about global interest rates and inflationary pressures sparked hefty losses this week amid fears that the recent deal-making craze may ebb

  • AFP
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  Wall Street's exuberance, which had lifted US stock indexes to a series of records, suffered a bruising in the past week as interest rate and inflation fears roiled investors.

  The Dow Jones Industrial Average of 30 blue chips slumped 1.78 percent for the week to 13,424.39, after hitting an all-time record high on Monday.

  The broad-market Standard & Poor's 500, which also hit a record on Monday, shed 1.87 percent for the week to end at 1,507.67 on Friday.

  The tech-rich NASDAQ composite lost 1.54 percent on the week to 2,5573.54.

  The hefty losses seen in the past week were sparked by worries about global interest rates and inflationary pressures. Some market participants fear the cheap credit environment could be coming to an end.

  "The world's central banks are all raising rates or are on hold," David Kotok at Cumberland Advisors said.

  "Not one of them is cutting rates. Higher rates mean the discounting mechanism for stocks is under pressure. Higher rates also mean that pressure is building on credit and banking and financials," Kotok said.

  The fears of a loss of easy credit -- including from abroad -- sparked worries that the corporate deal-making craze that has lifted the market in recent months may ebb.

  Although the US Federal Reserve has kept US rates unchanged for a year, most economists are not now expecting the Fed to trim rates any time soon as the world's biggest economy vies to regain its footing.

  In any case, some said stocks were overdue for a correction, which is normally seen as healthy way to take some of the speculative fever out of the market.

  "The market needed to cool off and in typical fashion it appears to be doing so very quickly," said Frederic Dickson, a chief market strategist at DA Davidson & Co.

  "Normally, there is a significant catalyst to trigger a pullback. Right now, the catalyst appears to be the combination of a minor increase in interest rates and the absence of positive economic or corporate news," he said.

  A dearth of market-moving economic news and a lack of new corporate mergers and acquisitions in the past week also were factors. Now market strategists are pondering how far the correction will go on Wall Street.

  "I think a lot of people are calling for a correction, a lot of hedge funds and others are set up for a down market. It's always surprising how sentiment can change so quickly," said Andy Brooks, head of equity trading at T. Rowe Price.

  Looking ahead, Brooks said: "I'm pretty optimistic, but I think a period of consolidation is due."

  The market was roiled by a rout in bonds, which sent the yield on the 10-year US Treasury note above five percent for the first time since August. Thursday's market action saw the worst bond market drop in three years, traders said.

  The yield on the 10-year Treasury bond leapt to 5.188 percent on Friday from 4.956 percent a week earlier while the 30-year bond yield increased to 5.22 percent from 5.062 percent.

  Some analysts are remaining upbeat that the coming week will not witness a significant market turnaround, but others are wondering if further declines could be on the cards.

  "There is a concern if our economy does re-accelerate ... those inflation numbers could back up again and that would result in the Fed potentially raising interest rates," Deutsche Bank analyst Owen Fitzpatrick said.

  "Normally, when we have those corrections, it's a little bit more than what we've seen so far," he said of the past week's performance.

  The coming week will see a flurry of economic reports released and significant attention is likely to be focused on fresh surveys on inflation and retail sales.

  Consumer prices, composed within the consumer price index (CPI), were widely expected to accelerate to 0.6 percent last month from a 0.4 percent clip in the prior month, while the core rate -- which excludes food and energy costs -- is seen holding unchanged at 0.2 percent.

  Retail sales for last month are seen rebounding with a 0.6-percent clip, following a 0.2 percent decline in the prior month. Investors will be tracking the retail release closely for hints on consumer spending, which accounts for the lion's share of US economic growth.
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