US stocks surge as oil prices tumble

Wall Street rallied today as oil prices tumbled, the service sector reported strong growth and investors embraced large-cap stocks such as Wal-Mart Stores, Coca-Cola and Home Depot.

The Dow Jones industrial average gained more than 141 points.

Investors rejoiced as crude oil and gas futures dipped following the decision by industrialised nations to release 60 million barrels of crude from strategic stockpiles after Hurricane Katrina.

A barrel of light crude settled at $65.85, down $1.61, on the New York Mercantile Exchange, while gasoline prices on the exchange fell 13c to $2.05 per gallon.

“Today was a relief rally; it was an oil price relief story,” said Lynn Reaser, chief economist of the investment strategies group at Bank of America. “Oil prices are still very high, but much more moderate than the worst fears of last week.”

The Dow rose 141.87, or 1.36%, to 10,589.24, its best one-day gain since July 8.

The Standard & Poor’s 500 index gained 15.37, or 1.26%, to 1,233.39, its best session since April 21.

The Nasdaq composite index added 25.79, or 1.2%, to 2,166.86 for its best point gain since July 19.

Bonds fell as stocks rose, with the yield on the 10-year Treasury note rising to 4.08% from 4.02% late on Friday. The US dollar was mixed against other major currencies. Gold prices were lower.

Stocks started the session substantially higher after the positive report on business activity in the services sector.

The Institute for Supply Management, which surveys 370 US businesses, said its non-manufacturing index rose to 65% in August from 60.5% in July. Any reading above 50 indicates the sector is expanding. The August reading was the best since April 2004.

Hopes that interest rates would stop climbing also buoyed the markets.

Last week’s softer-than-expected economic data reinforced some traders’ belief that the Federal Reserve would stop its year-plus campaign of short-term interest rate hikes earlier than it had planned, said Russ Koesterich, senior portfolio manager at Barclays Global Investments in San Francisco.

Last week’s data included a Commerce Department report that Americans spent more than they earned in July for just the second time in 46 years.

The Institute for Supply Management manufacturing index fell in August and a monthly index of industrial purchasing activity from Chicago also dropped dramatically.

Koesterich, however, is sceptical about whether traders’ views on the Fed are correct. As far as the economy goes ”I’m not sure anything has necessarily changed”, he said. ”We have seen some economic deceleration, but it doesn’t mean the Fed is going to pause.”

In company news, Dow industrials Home Depot and Coca-Cola climbed on expectation of rebuilding after Katrina and an analyst’s upgrade, respectively.

Home Depot rose $1.38 to $41.71 after the company said five of its stores remained closed because of Katrina, but it hopes to reopen three by week’s end.

Coca-Cola gained 62c to $44.52 after Banc of America Securities boosted its rating on the stock to “buy” from ”neutral”, citing potential upside to the firm’s fiscal 2006 earnings estimate and room for the stock’s valuation to rise.

Wal-Mart said only 18 of its stores and one call centre remain closed following Katrina, a major improvement from when Katrina hit, initially closing 126 of it facilities.

Eighty-nine facilities have reported damage with only nine having major damage. The shuttered stores represent a minor portion of the world’s largest retailer’s 3,800 outlets.

The company reiterated that Hurricane Katrina could hurt its sales for September. Wal-Mart climbed $1.14 to $45.69.

Troubled vaccine maker Chiron Corp. jumped 72c to $43.51 after its board rejected an all-cash takeover offer from Novartis AG, saying the offer is inadequate.

On September 1, Novartis had offered to buy about 58% of Chiron shares it does not already own at $40 per share. Novartis added 18c to $49.28.

Northwest Airlines fell 4c to $3.59 even after Standard & Poor’s downgraded its debt further into junk status. The nation’s fourth-largest carrier, whose mechanics are on strike, said Thursday it is running out of time to avoid bankruptcy.

Advancing issues led decliners by more than two to one on the New York Stock Exchange where volume was 1.42 billion shares, an increase from the 1.27 billion shares traded on Friday.

The Russell 2000 index of smaller companies rose 11.15, or 1.68%, to 674.48.