Rally ends amid inflation fears

NEW YORK: Wall Street's rally hit the skids over the past week as surging oil and commodity prices raised fears of inflation that may eventually crimp economic growth. 

The slide ended a rally that had lifted key indexes to their highest levels in three and a half years, leaving market analysts worrying about the outlook for the rest of 2005. 

The Dow Jones Industrial Average sank 1.52% over the past week to close on Friday at 10,774.36, unable to keep momentum in its run to the psychologically important level of 11,000. 

The broad-market Standard and Poor's 500, which opened the week at its best level in more than three-and-a-half years, tumbled 1.8% for the week to 1,200.08. 

The tech-heavy Nasdaq composite meanwhile retreated 1.4% to end at 2,041.60. 

The poor performance of the stock market this week was due to “the price of oil, a weaker dollar and Treasury yields backing up to 4.60%,” said Robert Pavlik, portfolio manager at Oaktree Asset Management. 

“I think we're probably going to test the lower edge of this trading range that we're in, which is probably about 10,670 (on the Dow).” 

Analysts said the market was whipsawed by higher oil and commodity prices, which heightened inflation fears. This weighed on the bond market, which further sapped investor sentiment. 

Crude oil prices in New York came within a few pennies of an all-time record, hitting 55.67 dollars a barrel, before settling back slightly. 

A report on Friday showing a widening US trade deficit weakened the dollar, which added to the mix of inflation concerns. 

The euro closed on Friday at 1.3480 dollars, leaving the greenback near its all-time low against the single currency. 

“Although the job market is not yet strong enough to put much upward pressure on wages and productivity gains remain strong, the risk of higher inflation is slowly rising,” said Lynn Reaser at Bank of America. 

“The market hates uncertainty and that's what we've got on inflation,” said Jay Suskind, a market strategist at Ryan Beck and Co. 

“Here's the story for equities: twin deficits, a weak dollar, accelerating inflation concerns, firm commodity prices, rising bond yields and Fed tightening. Now if that doesn't sound like 1987 (the year of the stock market crash), we don't know what does,” said David Rosenberg, an economist at Merrill Lynch. 

Tobias Levkovich at Smith Barney said the occasion of the fifth anniversary of the all-time Nasdaq high on Thursday of 5,048 – a level most analyst say will take years to reach again – should serve as a lesson to investors. 

“Investors continue to chase faddish investment concepts, including commodities, hedge funds, weak dollar beneficiaries, and an inflation bias,” he said. 

“Learning from past missteps, such as the Internet craze, might prove worthwhile.” 

Stephen Roach at Morgan Stanley said he believes the “bubble” on Wall Street has simply shifted into other assets. 

“Unlike the excesses in equities five years ago, today's bubble is more of an interest-rate and currency phenomenon – complete with extraordinary compressions of interest-rate spreads in notoriously risky asset classes such as emerging-market debt, high-yield securities, and a broad array of credit instruments,” he said. 

“In my view, these bubbles are joined at the hip, with today's excesses very much an outgrowth of the post-equity-bubble defence tactics of America's Federal Reserve.” 

Bond prices were hammered as investors braced for higher inflation. 

The yield on the 10-year US Treasury bond surged to 4.535% from 4.310% a week earlier, while that on the 30-year bond jumped to 4.809% against 4.650%. A rise in yields reflects a drop in bond prices. – AFP  

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