Expectations that Bernanke & Co. will cut rates again on Wednesday sent equity indexes higher, even though oil spiked to almost $94 a barrel
Stocks gained more ground on Monday, extending Friday's rally on expectations that the Federal Reserve will provide further relief to the struggling U.S. economy by cutting interest rates again on Oct. 31.
One of the day's highlights was awaiting official word from Merrill Lynch (MER) about CEO E. Stanley O'Neal, who was reportedly negotiating the terms of his forced departure in the wake of a multibillion-dollar write-off he announced last week. And crude oil prices spiked up to almost $94 a barrel.
On Monday, the Dow Jones industrial average rose 63.56 points, or 0.46%, to 13,870.26. The broader S&P 500 index was up 5.7 points, or 0.37%, to 1,540.98. The tech-heavy Nasdaq index added 13.25 points, or 0.47%, to 2,817.44.
Blue-chip issues and stocks tied to forest products, auto parts and investment banks were among the best performers. Bullish sentiment, however, was limited, as evident in lackluster volume and tepid market internals, notes S&P MarketScope. On the NYSE, breadth was 19-13 positive, while NASDAQ breadth was tied at 15-15.
Oil prices hit another new high. December NYMEX crude ended up $1.58 a barrel at $93.44, after touching a new all-time high of $93.80. Adding to ongoing buying pressure from speculators based partly on political tensions on the Turkey-Iraq border is a storm in the Gulf of Mexico that prompted state-owned Petroleos Mexicanos, the third-largest crude supplier to the U.S., to shut down about 600,000 barrels a day of output, or 20% of its production, according to Bloomberg News. Also helping to buoy oil prices: New lows in the U.S. dollar vs. the euro.
Many investors expect the Fed to lower interest rates by a quarter of a percentage point when its two-day meeting concludes on Wednesday. The main concerns are the continuing deterioration in the housing market and the subprime-sparked credit crunch will hamper economic growth. But Fed Chairman Ben Bernanke is reported to be resistant to the idea of cutting rates again, Action Economics said. Bernanke is most likely concerned about the heightened inflation risk with oil trading above $90 a barrel.
David Malpass, chief economist for Bear Stearns, said in a note Monday that he expects the Fed to lower rates by a quarter point on Halloween. "We think the U.S. slowdown and global credit market disruptions will pressure earnings, equity prices, commodities and foreign growth more than is reflected in the current consensus," Malpasss said. "We think consumption growth will slow to its weakest since the 1991 recession."
Looking ahead, Malpass thinks that headline inflation could go above 3.5%, with more possible due to gasoline price hikes, complicating prospects for a future rate cut. He also noted he is "increasingly concerned about dollar weakness."
The next batch of economic data comes out Tuesday, when the Conference Board's October index of consumer confidence is expected to hold fairly steady, after a roughly six-point declines in September and August. The better-monitored numbers will be the third-quarter GDP, Chicago Producer Price Index for October and September construction spending on Wednesday and October nonfarm payrolls on Friday.
Among stocks in the news Monday, Merrill Lynch & Co. (MER) CEO E. Stanley O'Neal is reportedly still negotiating the terms of his forced departure in the wake of a multibillion-dollar write-off he announced last week, the Wall Street Journal reported. Merrill's board is expected to consider external candidates and current Merrill executives in its search for a successor. O'Neal's resignation is expected to be announced as early as Monday. Standard & Poor's upheld its buy rating on the stock.
UBS AG (UBS) reconfirmed that it will report an overall group loss for the third quarter on Tuesday between 600 million to 800 million Swiss francs. The Swiss bank said that the fourth quarter has had a good start but that its FICC business remains exposed to further deterioration in U.S. housing and mortgage markets, as well as rating downgrades for mortgage-related securities, which could lead to further write-downs. As a result, UBS isn't assuming that the fourth quarter will continue to be positive, or that current difficulties will be resolved soon.
Kellogg (K) posted an 8.5% rise in third-quarter earnings to 76 cents a share from 70 cents a share a year ago on a 6.4% increase in sales to $3 billion, driven by the international segment. The latest results included five cents a share in restructuring costs, three cents more than in the year-ago period. The maker of Special K cereal and Pop-Tarts said cited continuing challenges from rising grain and fuel costs.
RadioShack (RSH) managed to swing to a profit of 34 cents a share in the third quarter from a net loss of 12 cents a share a year ago, despite a 8.6% decline in same-store sales and a 9.4% drop in total sales. The electronics retailer pointed to a negative sales trend in the Sprint post-paid wireless and related wireless accessory businesses, partially offset by strong results in prepaid wireless phones and global positioning systems.
European equity indexes finished higher Monday. In London, the FTSE 100 index rose 44.7 points, or 0.67%, to 6,706. Germany's DAX climbed 60.5 points, or 0.76%, to 8,009.67. In Paris, the CAC 40 gained 41.32 points, or 0.71%, to 5,836.19.
Asian markets ended higher. In Japan, the Nikkei 225 index advanced 1.17% to 16,698.08. In Hong Kong, the Hang Seng index jumped 3.89% to 31,586.90. The Shanghai composite index rose 2.83% to 5,748.00.
Treasuries strengthened in price as a positive bias leading up to the FOMC policy statement Wednesday drove direction, reflecting speculation the Fed will lower the federal funds rate target by 25 basis points to 4.50%.
The 10-year note rose 06/32 to 102-31/32 for a yield of 4.37%. The 30-year bond rallied 21/32 to 105-17/32 for a yield of 4.65%.