Bank stocks joined a broad market rally Wednesday fueled by the Clinton administration's decision to support the faltering Japanese yen by selling about $4 billion in the currency markets.
The yen jumped to 137.6 per dollar from 143.5, a 4.2% shift, because the Treasury said early Wednesday that it and Bank of Japan were selling dollars and buying yen. It was the U.S. government's first direct intervention in the foreign currency markets since August 1995.
Economists said the action was triggered by China's threatening to devalue its currency if the yen fell further and renewed promises by the Japanese government to rid its troubled banking system of nonperforming loans.
The Federal Reserve Bank of New York, serving as the Treasury's agent, had sold approximately $4 billion by midafternoon Wednesday, according to traders at major U.S. trading banks. Federal Reserve officials declined to comment.
"This is a real crossing of the line," said Ian Shepherdson, chief U.S. economist at HSBC Securities. "If the U.S. government is going to try to scare the speculators away, they will have to sell dollars more than once. They will have to make a real commitment, because if they do it just once they'll have no credibility. And we need to see some action from Japan."
Some traders said they expect the U.S. and Japanese governments to sell dollars until the yen reaches 130 per dollar.
Investors rejoiced upon learning of the U.S. government's support for Asian markets and currencies, driving up the Standard & Poor's bank index 2.25% on a Wednesday buying spree. The S&P 500 rose 1.80%.
The bond market plunged. Yields on the benchmark 30-year government bond rose to 5.75% late in the afternoon, from 5.57% on Monday.
While the U.S. government's attempt to prop up the yen may alleviate investor concerns about Asian markets, several analysts said it would not likely reawaken enthusiasm for U.S. bank stocks, which have suffered since Asia's economic turmoil burst forth last October.
Regardless of what happens in Asia, more and more analysts believe bank stocks here have simply lost their momentum.
"Bank stocks no longer provide leadership in this market," said Prudential Securities analyst Joel W. Silverstein, who has rated the entire industry "hold" since February.
He noted that the kinds of announcements banks have relied on in recent months to generate enthusiasm for their stocks, such as acquisition announcements, are falling on increasingly deaf ears.
KeyCorp, for example, announced it would hop on the commercial investment bank bandwagon Monday by acquiring McDonald & Company Securities Inc. The bank said the acquisition would add $30 million to earnings, but Mr. Silverstein said that would not be enough to change his earnings forecasts for the big Cleveland banking company. KeyCorp's stock has fallen 75 cents since the deal was announced.
The lackluster response may reflect growing investor impatience with banks digging ever deeper into their pool of stock to finance their costly mergers.
"The prices are getting so high that shareholders are beginning to say to managements, 'You're not going to pay up if you make a deal, are you?'" said Ralph D. Gibson Jr., senior portfolio manager at Banc One Investment Advisors in Columbus, Ohio.
"If you want to make a deal now, shareholders are saying, 'Barter. Do a merger of equals,'" Mr. Gibson said.
Of course, sentiment toward bank stocks could change quickly if, as many analysts expect, the companies report solid earnings next month.
This could restore confidence in the stocks and trigger a fierce round of consolidation, because executives at companies that disappoint will have to face antsy shareholders demanding they sell, even if they get less than the stratospheric premiums that banks were selling for six months ago.