Markets Eye Inflation More Than Bosnia

CONCERNS about a renewal of inflation and a possible increase in interest rates are currently driving United States financial markets.

Last Thursday the bond and stock markets reacted negatively to reports that inflation may be inching back up in the US economy. All major financial markets fell in heavy trading. On Friday the Dow Jones industrial average closed at 3,443, up 5.82 points for the week. Despite increasing discussion by Western powers of the use of limited force to end the war in Bosnia, the Balkans are just "not relevant" to stock market concerns at this juncture, says one New York brokerage official.

That aloofness regarding foreign policy contrasts sharply with market reaction to the Gulf crisis, which had a generally negative initial impact on financial markets. Following the Iraqi invasion of Kuwait on Aug. 2, 1990, the bears roared through a number of global financial exchanges; in the US, stock prices stayed well below the level of the pre-invasion market throughout the summer; sales for the big three US auto firms fell precipitously amid concerns that an oil shortage would develop.

But regarding Bosnia, "about the worst thing that could happen for the US now is that Washington would begin bombing Serbian targets," the brokerage official says. That action by itself would not disturb the markets. The financial community is not "indifferent" to the plight of the people caught up in the Bosnian situation, the official says; rather, Bosnia is a "sideline issue" in terms of the global economy.

What's clearly troubling the financial community are questions about the durability of the US economic recovery, including a possible resurgence of inflation, says Larry Wachtel, a vice president with Prudential Securities Inc.

Mr. Wachtel says that the general public may have been surprised by last week's wide swings in the Dow. But, although that index gets most of the media attention, other broader market indicators have been steadier.

In recent weeks the Dow has been marching upward. What's forgotten, Wachtel says, is that the blue-chip Dow often does well because of one or two fast-moving stocks in that narrow 30-stock index. Broader measurements, such as the Standard & Poor's 500 stock index and the Nasdaq over-the-counter market, tend to highlight a wider spectrum of companies.

Apprehensions about inflation came to a head last week with the release of the Consumer Price Index for April, which rose 0.4 percent, higher than had been expected. That hike brought the US inflation rate close to a 4.3 percent annual rate so far this year, well above the 2.9 percent rate for all of 1992. Some economists say the April spike was a statistical fluke, reflecting weather-related prices for produce.

David Hale, chief economist for Kemper Securities Inc. in Chicago, says that, for now at least, financial markets will continue to focus on domestic matters, rather than international affairs.

"The Bosnian crisis," he says "is a very different set of issues from the Gulf war. Serbia has already largely achieved its objectives," which means that any possible US action would presumably be very limited, he says. The one major danger is that the war could escalate into a larger Balkan war. Any use of American ground forces would certainly get the quick attention of Wall Street, he reckons.

"The stock market has enough problems on its agenda" without worrying about Bosnia, argues Dennis Jarrett, chief market analyst for Kidder, Peabody & Co. The financial community, like most people, grieves over the situation there, he says. But unless the conflict grows into a Vietnam scenario, it is likely that the stock market will continue to sit on the sidelines.

If the US were to get into the conflict, Mr. Jarrett notes, the market would probably drop initially. He notes that some companies might profit from US intervention. Moreover, the war would be used to block spending cuts at the Pentagon.

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