Wall Street and many other hemispheric markets rebounded Tuesday after President Clinton bypassed Congress and launched his own Mexican support program.
Markets battered by the aftershocks from Mexico’s troubles since early December staged strong rallies: the Mexican Bolsa jumped 10.2 percent; Argentina’s Merval index climbed more than 7 percent and its general index rose 5.4 percent; and Canadian markets rebounded sharply after four days of declines.
The Dow Jones industrial average gained 11.78 points, to 3843.86, on heavy New York Stock Exchange volume of more than 411 million shares. The Nasdaq index rose 3.37 points, to 755.20.
The Mexican peso meltdown has had repercussions in world markets far beyond Mexico. Stock markets in countries as isolated from Latin America as Sweden were shaken by the peso’s more than 40 percent drop against the dollar.
Investors around the globe watched Mexico’s free fall as a model of what could happen to poor nations trying to become rich nations through free-market practices, a heavily trod path since the end of the Cold War, and didn’t like what they were seeing.
Despite support from figures as venerable as Alan Greenspan, chairman of the Federal Reserve Board, and three ex-presidents, Congress and the American people balked at the proposed $40 billion loan guarantees. Without U.S. backing, Mexico probably could not have lined up the $35 billion needed to pay its debts over the next year.
The markets acted as though the crisis has been averted, though some analysts still warned Mexico may not be able to sort out its affairs well enough in the coming months to achieve economic health.
“This isn’t the first time this has happened,” said Jim Benning, a trader at BT Brokerage. “I don’t see how throwing cash at the problem really fixes it.”
“I think that (Clinton’s pledge) has helped the market, but I’m not sure that’s going to last,” said Paul Hennessey, a trader at Bos-ton Co. “As we get more discussion, we may see the snapback tempered a little bit.”
Mexican stocks traded in the U.S. staged a major turnaround. Telmex, the bellwether Mexican telephone company, gained steadily all day, closing up $4.50 at $35.62, a jump of more than 14 percent. More than 17.6 million shares of the stock changed hands, the most actively traded security on the NYSE composite index.
The Mexico Fund gained $2.50, to $19.62, and the Mexico Equity & Income Fund picked up $1.62, to $13.75. Telefonica de Argentina rose $5.50, to $51.50.
There were some surprises elsewhere in the market.
General Motors caught auto analysts napping by reporting a fourth-quarter profit of $1.74 per share, above predictions that ranged from $1.09 to $1.55. The news sent the stock up $1.50, to $38.87.
GM stock has been beaten down as a consequence of profit problems in its core U.S. market and the general wisdom, perhaps now being reconsidered, that auto sales had peaked and were heading down.
“For the the last six months, we have been absolutely devoid of the automobile-makers because we’ve thought the consumer was tapped out,” said Joseph Doyle of 1838 Investment Advisors in Radnor, Pa. Doyle said reconsideration may extend to such retailers as The Gap, which also have been trounced on expectations of consumer burnout.
The Dow industrials were buoyed by a rise in IBM shares. Big Blue, which hasn’t been called that much in the last few years as its stock trailed down from the heights, fell $1.50 early in the day and then recovered to close up 37 cents, at $72.12. IBM announced it would would buy back $2.5 billion of its stock, joining the lengthening line of major companies engaged in stock repurchase plans, often a bullish sign.
In the news background, traders kept a weather eye on the Fed’s Open Market Committee meeting, which started Tuesday and winds up Wednesday. The market has pretty much discounted a rise in the federal-funds rate of a half point, to 6 percent from 5.5 percent, which would be the seventh increase in the last 12 months.
The troubles in Mexico will restrain the Fed from a bigger hike, it is postulated, because that would make it even more expensive for Mexico to borrow what it needs to service its debt. It was hikes in U.S. rates, after all, that helped create the peso crisis, because as U.S. rates went up, Mexico had to pay more for its debt, thus making it more expensive to defend the peso.
“We’ll probably have some kind of relief rally” if the Fed tightens only a half point, Doyle said.
Heartland report: Premark International of Deerfield, maker of Tupperware, said its income this year may be reduced by 10 cents a share due to the devaluation of the Mexican peso and effects from the recent earthquake in Japan.
Premark stock fell $5.25, or 11 percent, to close at $41 despite the added announcement of better-than-expected 4th-quarter earnings.
The earthquake at Kobe may cut first-quarter earnings by a nickel, said Christine Hanneman, Premark’s head of investor relations. About a third of Premark’s Tupperware dealers in Japan, where the company has been notably successful in penetrating the difficult consumer market, have been affected by the quake.
The decline in the peso likely will trim 1995 earnings by 5 another cents a share, Hanneman said.
