NEW YORK (CNNfn) - Wall Street got a rally Monday as investors put aside their dread of rising interest rates on the eve of a key Federal Reserve rate-setting meeting. Instead, blue chips and technology shares both surged in concert with a rebounding bond market.
The Dow Jones industrial average jumped 102.59 points, or nearly 1 percent, to close at 10,655.15. Volume on the New York Stock Exchange tapered off to 645 million shares, its second-lowest level of the year, while advances outpaced declines 1,846 to 1,147.
The Nasdaq composite rose 49.80 points, or 1.95 percent, to 2,602.45, while the S&P 500 index gained 16.04, or 1.2 percent, to 1,331.35.
Stocks rose in concert with a rally in the beleaguered bond market, where investors covered their positions amid news of a growing U.S. budget surplus and weaker-than-expected May personal income data. The benchmark 30-year Treasury bond surged 20/32 of a point in price, pushing the yield down to 6.09 percent.
Despite the benign economic news and ensuing bond market rebound, investors in all U.S. financial markets kept one eye firmly on the Federal Reserve, which meets Tuesday and Wednesday to determine interest rate policy. Most investors now expect the Fed to raise the funds rate by 25 basis points, a quarter percentage point, to 5 percent, although some fears remained of a sharper increase.
"Obviously the situation turns very heavily on interest rates," said Hugh Johnson, chief investment officer at First Albany. "Clearly, interest rates are the whole problem." (325K WAV) (325K AIFF)
The dollar was mixed in cautious trading, edging higher on the euro but easing from the yen.
Financials get rate relief
Bonds' show of strength bled into the stock market, where investors have fretted over the future of U.S. interest rates for weeks. As a result, interest-rate sensitive shares like financial-services stocks were rewarded with a particularly sharp bounce.
Rising interest rates put pressure on the bottom line for financial firms like banks and brokers by making their primary business -- moving large sums of cash around -- relatively more expensive. Moreover, high interest rates impair lending, depriving banks of a vital source of revenue.
Among the Dow's financial components, American Express (AXP) surged 2-13/16 to 125-1/2 and Citigroup (C) climbed 2-3/16 to 46, while J.P. Morgan (JPM) gained 5-1/2 to 134-1/16.
Elsewhere in the financial sphere, shares of broker Lehman Brothers (LEH) leapt 3-11/16 to 57-1/8 amid the rate relief and news that the firm had entered into a marketing alliance with mutual fund manager Fidelity Investments. In the new arrangement, Lehman will become Fidelity's main source of research and brokerage services, while Fidelity will channel its clients to Lehman in return.
Other brokers also were sharply higher. Shares of Bear Stearns (BSC), which Monday paid $25 million in fines and penalties to settle fraud allegations, climbed 2-5/8 to 43-7/8 and Donaldson, Lufkin & Jenrette (DLJ) added 2-15/16 to 55-1/2. Paine Webber (PWJ) gained 2-3/16 to 41-1/2 and Charles Schwab (SCH) climbed 5-5/16 to 94-13/16.
Internets join winning team
Technology companies, which rely on heavy borrowing to finance corporate growth, also flourished in the day's more relaxed attitude toward the prospect of higher interest rates, with a late rally in the Internet sector cementing the day's gains.
Most technological bellwethers traded higher, with Microsoft (MSFT) climbing 1-13/16 to 86-3/4 and Intel (INTC) gaining 1-11/16 to 57.
Among computer stocks, Dell (DELL) edged up 1/8 to 37-1/16. On the Dow, Hewlett Packard (HWP) jumped 4-7/8 to 97-1/2, but IBM (IBM) slipped 9/16 to 122-9/16.
In the Internet sector, Yahoo! (YHOO) overcame early weakness to end the day up 9-5/8 at 156-1/2. CMGI (CMGI) gained 3-7/16 to 97-11/16 and eBay (EBAY) firmed 4-1/16 to 140-1/16.
Freight stocks lead transport rally
Shipping and freight stocks outpaced the broader market, pushing the Dow transportation index up 81.06 points, or 2.4 percent, to 3,397.17.
Federal Express parent company FDX (FDX) led the charge, climbing 2-7/8 to 55-3/8 after receiving a vote of confidence from Merrill Lynch analyst Jeffrey Kauffman, who expects FDX to beat Wall Street's expectations when it reports second-quarter earnings Wednesday, although he cautioned that rising interest rates could hurt the stock's long-term growth potential.
According to estimate-tracking firm First Call, FDX is expected to earn 71 cents per share.
Competing freight companies got a lift from the bullish nod to the sector's biggest player, with Airborne Freight (ABF) surging 1-1/4 to 28-5/8, while CNF Transportation (CNF) gained 7/8 to 39-1/2.
Elsewhere on the summer earnings front, pharmacy chain Walgreen (WAG) joined the growing trickle of companies reporting strong earnings growth. Shares gained 1-3/4 to 29-5/16 after the company posted a fiscal third-quarter profit of 16 cents per share, beating forecasts by a penny.
In the day's deals, energy-minded investors took heart from a $1.2 billion merger between regional power provider Wisconsin Energy (WEC) and natural gas supplier Wicor (WIC). Wicor shares climbed 1-9/16 to 28-1/8, but Wisconsin Energy slipped 1/2 to 26-9/16.
Nalco Chemical (NLC) shares leapt 9, or more than 21 percent, to 51-1/2 after the company agreed to a $4.1 billion buyout from water and water-treatment heavyweight Suez Lyonnaise des Eaux. Under terms of the merger, the French company will offer investors $53 per Nalco share, a premium of 24 percent above Friday's closing price.
Finally, shares of Marshall Industries (MI) rocketed up 15-11/16, or nearly 78 percent, to 35-13/16 after rival electronic-components distributor Avnet (AVT) launched a $830 million cash-debt-and-stock takeover bid for the company. Avnet shares eased 2-5/8 to 45-3/16.
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