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Stocks Rally on Rate-Cut Expectations

Wall Street: Despite another gloomy economic report, many investors remain upbeat. Foreign markets climb.

November 06, 2001|Times Staff and Wire Reports

Stock markets worldwide staged another powerful rally Monday, as expectations of lower interest rates trumped more downbeat news on the economy.

On Wall Street, the Nasdaq composite index gained 47.92 points, or 2.7%, to 1,793.65, the technology-heavy index's highest close since Aug. 31.

The Dow Jones industrial average added 117.49 points, or 1.3%, to 9,441.03.

Many foreign markets posted bigger gains. Germany's blue-chip DAX index jumped 3.8%, while Brazil's main index surged 6.8%.

In other trading, U.S. Treasury bond yields resumed their decline ahead of today's meeting of Federal Reserve policymakers, who are expected to announce the 10th cut this year in the central bank's key short-term interest rate, now 2.5%.

In energy markets, oil and natural gas prices continued to slide, with crude-oil futures in New York closing at a two-year low--another victim of the slumping global economy.

Against a backdrop of increasingly dismal economic news, stock prices in the United States and in many foreign markets have posted strong rebounds since Sept. 21, when most markets hit multiyear lows after the Sept. 11 terrorist attacks.

On Monday, the National Assn. of Purchasing Management, a corporate trade group, said its index of U.S. nonmanufacturing business activity fell in October to its lowest level in the survey's four-year history. That indicates the U.S. services sector contracted sharply, cementing widespread fears the nation slid even deeper into recession after the attacks.

But many stock buyers are betting the global economy will be recovering by spring, analysts say. Historically, the stock market has rallied well ahead of recoveries, so many investors fear they'll miss out on bargains if they wait to buy.

Rising issues outnumbered losers by 2 to 1 on the New York Stock Exchange on Monday and by 3 to 2 on Nasdaq. Trading volume was moderate.

"The stock market usually looks ahead about six months, so it doesn't surprise me to see that people are starting to anticipate the ultimate rebound," said Matt Brown, head of equity management at Wilmington Trust in Delaware.

When an economic revival will occur, however, remains a subject of heated debate. Many economists believe that only a modest recovery is possible in 2002. As stock prices continue to rise, the risk is that they already may have "priced in" a corporate earnings recovery next year, and perhaps even a 2003 recovery, market bears say.

But in the near term, investors' hopes may be buoyed by lower interest rates.

The Fed is expected today to cut its key rate at least a quarter point, to 2.25%, and perhaps as much as a half point, to 2%, as policymakers try to keep credit available in a struggling economy.

At 2.5%, the Fed's rate already is the lowest in 40 years.

"The weak economic data we've seen should push the Fed over the top" and trigger a half-point rate cut, Michael Cloherty, bond strategist at Credit Suisse First Boston, told Bloomberg News.

Those expectations helped push Treasury bond yields lower. Long-term bond yields plunged Wednesday and Thursday after the Treasury announced it will no longer issue 30-year bonds. That sent investors rushing to lock in yields on other long-term securities.

Profit-taking halted the bond rally on Friday, but buyers returned on Monday. The 10-year Treasury note yield, a benchmark for mortgage rates, fell to 4.30% from 4.36% Friday. The 30-year T-bond dropped to 4.85% from 4.95%.

"People who missed the rally of last week" are buying 30-year bonds, Jim Claire, director of fixed-income trading at Evergreen Investment Management Co. in Charlotte, told Bloomberg News.

Lower energy prices also may be helping bonds: Falling oil and natural-gas prices are damping inflation concerns.

Crude-oil futures in New York fell to two-year lows Monday, the fifth straight decline, on expectations that OPEC will fail to achieve production cuts needed to bolster prices. Near-term oil futures ended at $20.02 a barrel, down 16 cents.

Natural-gas futures in New York dived 10%, the biggest drop in two months, as forecasts for mild weather in the near future suggested demand will be lower than expected. Natural-gas futures for December fell 32.6 cents to $2.922 per million British thermal units.

Among Monday's market highlights:

* European stock markets were bolstered by signs that the European Central Bank might get more aggressive about cutting interest rates. The British market rose 1.6%, and the French bourse jumped 2.7%.

* On Wall Street, technology stocks boosting Nasdaq included a number of computer chip makers. Broadcom rose $2.41 to $40.26, its highest since Aug. 16. Applied Micro Circuits gained $2.21 to $13.85, and Cypress Semiconductor rallied $1.60 to $22.25.

* Software stocks gaining ground included Veritas, up $2.78 to $33.74; Siebel Systems, up $3.52 to $20.81; and Microsoft, up $1.87 to $63.27.

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