/ 7 June 2006

US stocks continue fall after Bernanke’s comments

United States stocks dropped for the second straight session on Tuesday, with the

Dow Jones industrial average falling to its worst close since March 9. Global markets also sold off as inflation fears worsened.

The Dow lost more than 110 points in midday trading before narrowing its loss later in the session. The index dropped nearly 200 points on Monday after Federal Reserve chairperson Ben Bernanke spooked Wall Street by saying that the central bank will remain vigilant in fighting inflation.

Investors have been hoping the Fed would stop increasing short-term interest rates after 16 hikes; the nation’s benchmark rate now stands at 5%. However, Bernanke’s comments in recent weeks have repeatedly shaken investors and sent stocks tumbling.

”Bernanke came in with this reputation as a great communicator,” said John Caldwell, chief investment strategist for McDonald Financial Group, part of Cleveland-based KeyCorp. ”Most of us would choose to go back to the general confusion [former Fed chairperson Alan] Greenspan created.”

The Dow fell 46,58, or 0,42%, to 11 002,14. The Dow fell 199,15 points, or 1,77%, during Monday’s session.

Broader stock indicators were also lower. The Standard & Poor’s 500 index fell 1,44, or 0,11%, to 1 263,85, and the Nasdaq composite fell 6,84, or 0,32%, to 2 162,78.

Declining issues led advancers by more than two to one on the New York Stock Exchange.

Stocks in most Asian markets fell hard on Tuesday, with Tokyo’s Nikkei 225 index down 1,81%, while India’s benchmark index fell 2,51%. The major European indexes also dropped, with Ireland’s benchmark index down 4,89% and Austria’s benchmark falling 4,75%.

Bonds rose, with the yield on the 10-year Treasury note falling to 5,01% from 5,02%late on Monday. The US dollar was mixed against other major currencies, while gold prices were lower.

Crude oil futures were down slightly. A barrel of light crude settled at $72,50, down 10 cents, in trading on the New York Mercantile Exchange.

Wall Street’s decline comes as investors fret about Bernanke’s communication skills. For instance, CNBC reported on May 1 that Bernanke believed investors had misinterpreted his recent congressional remarks as an indication the Fed was nearly done raising rates. Stocks — which had been up for most of that day — slumped immediately and Bernanke later said he regretted the remark.

”Seeds of confusion continue to be sown by this new Fed, and there is no doubt a risk that we will see a policy misstep at the end of June,” wrote David Rosenberg, Merrill Lynch’s North American economist, in a note to clients on Tuesday.

The fear among investors is that an over-vigilant Fed will raise rates too far, cooling the economy to the point of recession.

Bernanke’s communication stumbles have only served to make the market more nervous.

Investors have plenty of other worries, too, including sky-high commodity prices and turbulence in foreign markets.

”You have all these factors going on,” said Ralph Acampora, managing director of technical research Knight Capital Group. ”What Bernanke said the other day is the pin that hit the balloon.”

Some of the stocks that have seen the biggest run-up over the past three years look especially vulnerable now. One of the sectors hit hardest on Tuesday was homebuilding, where a group of stocks fell following a downgrade by Wachovia Securities. DR Horton, the largest US homebuilder by units, fell $1,40, or 5,6%, to

$23,41; KB Home fell $3,28, or 6,7%, to $45,82 and Pulte Homes fell $1,64, or 5,5%, to $28,11 after the downgrade.

In other company news, IBM rose 70 cents to $79,76 after the technology company said it would triple its investments in India to $6-billion over the next three years. Chairperson and chief executive Sam Palmisano said the investment will be used to build service delivery centres in Bangalore, India’s technology hub, and create telecommunications research and innovation centre for IBM’s telecom clients around the world.

Hewlett-Packard fell 69 cents to $30,90 after the company revised its full-year outlook upward, thanks to a favourable tax settlement with the US government. The revised forecast still fell short of analysts’ expectations.

Volume on the New York Stock Exchange came to 1,90-billion shares, up from 1,63-billion on Monday.

The Russell 2000 index of smaller companies fell 2,96, or 0,41%, to 710,96. – Sapa-AP