Markets begin week on calmer note after volatile week

August 15, 2011

Stocks rallied Monday as a flurry of mergers and acquisitions boosted confidence, propelling the market to a three-day winning streak that has eclipsed the losses suffered in last week’s heavy selling.

The blue-chip Dow Jones industrial average closed at 11,483, up 1.9 percent. The Standard & Poor’s 500-stock index, a broader market measure, advanced nearly 2.2 percent to end the day above the 1200 level for the first time in more than a week. The tech-heavy Nasdaq gained nearly 1.9 percent to close at 2555.

The rally extended to Asian markets early Tuesday. Japan’s blue-chip Nikkei 225 index ended its morning session 116 points above the key 9,000 benchmark, a gain of 0.33 percent.

The positive results mean markets have followed up what had been one of the worst weeks since the 2008 financial crisis with one of the best three-day advances. Each of the three indexes has gained more than 7 percent in the past three sessions and surpassed its losses from last week’s volatile trading.

For the Dow index, that made the past three days its largest percentage gain since March 12, 2009, when it was just beginning to recover from its crisis low.

Analysts pinned the rally in part to Monday’s $23.6 billion worth of mergers and acquisitions, the most since July 21, deal tracker Dealogic said.

“Whenever there’s deals happening, it helps get the market turned around very quickly,” said Bob Carey, chief investment officer at asset manager First Trust in Wheaton, Ill. “That’s a sign companies are feeling confident about their prospects,” and this helps get investors thinking, “If they’re putting their cash to work, maybe I should put my cash to work,” Carey added.

Google’s $12.5 billion cash offer to buy cellphone maker Motorola Mobility accounted for more than half the value of the deals announced Monday. A $3 billion cash offer by cable giant Time Warner to buy cable operator Insight Communications from the Carlyle Group, the District-based private equity firm, was a distant second.

The blockbuster deals came after a better-than-expected report on Japan’s economic growth in the second quarter, which sparked a rally in Asian shares Monday. European markets also ended Monday modestly higher.

But the lingering uncertainty over Europe’s debt crisis could make for a “choppy” third quarter, said Barry Bannister, equity strategist with Stifel Nicolaus in Baltimore. That’s because European officials have yet to come up with “something more definite than patchwork, piecemeal solutions” that leave markets uncertain whether the problem is really solved, Bannister said.

U.S. stocks could become relatively more attractive than their European counterparts since “we’re farther along and better positioned” to overcome the country’s financial problems, Bannister said. A gradually improving labor market and falling oil prices also could lift the economy in the second half of the year, he added.

But oil continued its rebound from last Tuesday’s close of below $80 a barrel. Crude futures ended Monday up $2.50, to $87.88.

Investors also continued to seek safety in gold, which closed up 1 percent at $1,756 per ounce from Friday’s $1,740.

Treasurys, another safe store of value, lost some of their allure as yields eased to 2.3 percent on the government’s 10-year bond, up from 2.26 percent Friday. A higher yield indicates investors are less willing to accept a low return in exchange for the safety of holding government debt.

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