Pessimism about bank stocks reigned Friday; the group fell sharply in response to an international currency crisis.
Traders watching the dollar continue to sink against other currencies, despite buying by the Federal Reserve and other central banks, held out little hope that the currency could be stabilized without another interest rate increase by the Fed.
That thinking dragged down banks with the U.S. stock and bond markets despite sentiment in some quarters that banks today are positioned to benefit from higher rates.
"We are going to have to get some confidence that financial markets are stabilizing, that pressures on interest rates are receding, and that will probably take a couple of days," said Lawrence W. Cohn of PaineWebber Inc.
Rate Problem for Banks
"If interest rates are going much higher, bank stocks have got a problem," Mr. Cohn said. "To the extent that the market thinks the Fed already has done enough, higher interest rates are negative for the economy" and, thus, for banks, he said Friday afternoon. "Bank stocks reflect that today."
At the close, all but three of the top 50 banks in market capitalization were off, with some bank stocks falling faster than the broader market.
J.P. Morgan & Co. was off $1.125 a share, to $61.875; NationsBank Corp., $1.50, to $51.50; First Chicago Corp., $1.125, to $47.25; and Bankers Trust New York Corp., $1.375, to $67.25.
The exceptions were Integra Financial Corp. and Amsouth Bancorp., both unchanged, and Shawmut National Corp., up 37.5 cents a share, to $21.50.
The Dow Jones industrial average fell 62.15 points, to 3,636.94. The 30-year Treasury bond was off $1.25, to yield 7.52%, after a seesaw session.
Dollar Out of Control?
Driving the rout was a feeling that the Clinton administration has lost control in its effort to strengthen the dollar, which had been testing new postwar lows against the yen for several days.
"That feeling will give the dollar bears the upper hand in the next few days," said Benoit Jadoul, vice president of exchange marketing at Chase Manhattan Corp.
"The market is still long dollars, even with all the selling," added Paolo Cugnasca, managing director of Emcor Risk Management Consultants, Irvington, N.Y.
"Global investors lack confidence in U.S. policies," said Mellon Bank chief economist Richard Berner, "and so are unwilling to hold our securities until they get cheap enough to compensate them for reasonable risks. Despite the ongoing turmoil in European bond and equity markets, therefore, they continue to seek investment opportunities abroad."
Fed Seen Acting Soon
Mr. Berner said that, because the economy is doing better than was presumed, the Fed must raise the federal funds rate by 25 basis points soon and increase the discount rate to at least 4%, with further increases possible before Labor Day.
Although the selloff indicated widespread gloom, some analysts said the storm would pass with little permanent damage.
"There are concerns that the Fed will tighten interest rates over the weaker dollar, but the Fed has to tighten them a lot to have a dramatic effect," said Moshe A. Orenbuch of Sanford C. Bernstein & Co., an analyst who believes banks are positioned to benefit from higher rates.
Smith Barney senior economist Mitchell Held said the problems would persist. "The dollar has been trending lower for the past couple of weeks. Traders will keep testing the market," he said.
He also argued that, for a dramatic recovery to take place in the bond market, the economy would have to slow down. "We haven't seen that yet," he said. Currency Crisis % change in stock price at 4:00 FridayNationsBank -2.8%J.P. Morgan -1.7Bankers Trust -2.0First Chicago -2.3Source: Reuters
