Storm Spreads to Stocks

The so-called other markets grabbed the spotlight for the second consecutive day Wednesday, while exerting greater downward pressure on equities, which nose-dived in the final hour of trading. On Tuesday, the dollar was the focus, while Treasuries rose to the fore Wednesday -- or, more precisely, fell to the fore.

Owing to a combination of technical factors, supply concerns, inflation fears and related worries about central bank rate hikes here and in Europe, selling in the fixed-income market was harsh. The price of the benchmark 10-year Treasury fell 29/32, its yield rising to 4.51% -- the highest level since July. The two-day rise in the yield is 21 basis points, the most since April, according to Bloomberg.

The selling began early in the day after Germany's stronger-than-expected industrial production report and comments from European Central Bank President Jean-Claude Trichet revived fears of ECB rate hikes, as reported here. In addition, there were fears about foreign interest in the Treasury's auction of five-year notes, which proved unfounded.

At 2.58, the bid-to-cover ratio was better than the last auction and slightly better than the average over the last year. Meanwhile, indirect bidders (which includes foreigners) absorbed 43% of the auction, down from the last auction's 45% but in line with the average of the past year and well ahead of preauction predictions of just 35%, according to RealMoney.com contributor David Merkel. But any potential for a postauction recovery was scuttled by the Fed's beige book report.

"Retail prices were generally flat or up modestly," the report said. "However, businesses continued to face rising input costs, and a number of districts indicated greater ease in passing along price increases."

Inflation concerns were further heightened by continued strength in commodities, including copper and gold. In addition, crude futures retested their recent highs of $55.70 intraday but moderated thereafter to close up 0.3% to $54.77. Energy stocks were sluggish even prior to oil's reversal, with ExxonMobil (XOM) falling 3.7% and taking the top spot among Big Board most actives, while Baker Hughes (BHI) lost 3.8%. The Amex Oil and Gas Index fell 2.6% and the Philadelphia Stock Exchange Oil Service Index slid 2.8%.