US stocks head higher

Wall Street showed signs of confidence in the credit markets today, surging higher in response to a pullback in Treasurys and an increase in borrowing by banks.

Investors saw both trends as signs that the Federal Reserve’s efforts to loosen up the credit market might be working.

The Dow Jones industrial average soared more than 140 points as the 3-month Treasury bill, which earlier in the week drew massive buying as investors sought the safety of short-term government assets, fell today.

The selling boosted its yield to 3.66%, up from 3.59% late yesterday and Monday’s low of 2.51% – an indication that stocks are no longer seen as risky as they were just a few days ago.

“It gives the market a little comfort that it’s not all about buying risk-free securities,” said Scott Wren, equity strategist for AG Edwards & Sons.

“There’s less of a flight to quality… In my mind, the pullback in the stock market is entirely due to what’s going on in the credit market. The fundamentals have been good. Valuations are reasonable. It’s just the fear of the unknown in terms of the credit market.”

Wall Street, which has been angling for the Fed to help ease the credit crunch by cutting the benchmark federal funds rate, was knocked down several rungs in recent weeks by worries about lending troubles crimping economic and corporate growth.

Today’s advance was Wall Street’s first substantial move higher after the Fed lowered its discount rate on Friday, trying to calm investors and avert damage to the economy from the stock market turmoil.

Although stocks rose on Friday, the advance was seen as an attempt by investors to square their positions rather than a fundamental shift in sentiment. And trading Monday and yesterday was clearly shaky.

However, market watchers cautioned that trading volumes were lower than normal today and that any troubling headline in the lending industry could still trigger credit fears and more selling.

Giving some investors reason to believe the steps the Fed has already taken may be enough, the nation’s four biggest banks – Citigroup Inc, JP Morgan Chase & Co, Bank of America Corp and Wachovia Corp – said they each borrowed $500m (€369m) from the Federal Reserve’s discount window.

Investors were also heartened that deal-making is persisting despite credit jitters. An affiliate of Dubai’s government said it was investing $5.1bn (€3.76bn) in casino operator MGM Mirage; Nymex Holdings Inc’s chairman said the commodities exchange has been meeting suitors; and mining company Rio Tinto plc said it was able to close the loan syndication to fund its buy of Canadian miner Alcan Inc.

The Dow rose 145.27, or 1.11%, to 13,236.13.

Broader stock indicators also jumped. The Standard & Poor’s 500 index rose 16.93, or 1.17%, to 1,464.05, while the Nasdaq composite index gained 31.50, or 1.25%, to 2,552.80.

As short-term government security prices fell, so did their longer-term counterparts. The 10-year Treasury note’s yield climbed to 4.64% from 4.59% late yesterday.

Also calming investors, the Fed made a relatively small repurchase of $2bn (€1.47bn), in which it buys that amount in collateral from dealers, who then deposit the money into commercial banks.

The Fed funds rate, the rate banks charge each other for loans, fell to 4.25% after opening at 5.125%. But traders who bet on the Fed’s next move were still pricing in an interest rate cut at its next meeting on September 18. Some speculate the central bank will lower rates before then.

Wall Street’s sentiment could turn if it does not get that rate cut – which is a distinct possibility, Mr Wren said.

“I don’t want the stock market betting on, counting on, needing the Fed to cut rates in September,” he said. “There’s a lot of reasons why the Fed wouldn’t cut rates. They’ve been talking about inflation for forever.”

For now, though, investors appeared satisfied that the Fed’s move on Friday to lower the discount rate is helping to keep the markets liquid.

It is a positive signal that banks are using the discount window as the Fed encouraged them to, said Michelle Girard, senior economist at fixed income firm RBS Greenwich Capital. On the other hand, she said, the four institutions that did so are not ones that have had difficulty tapping funds elsewhere.

“I still think everybody’s in a watchful, waiting mode,” Ms Girard said. “Certainly, things today looked more stable… but it’s way too soon to breathe a big sigh of relief and say the turmoil has past.”

The Russell 2000 index of smaller companies rose 10.18, or 1.29%, to 798.56.

Advancing issues outnumbered decliners by about 4 to 1 on the New York Stock Exchange, where volume came to 1.45 billion shares, up from 1.35 billion shares Tuesday but below last week’s levels.

Nymex Holdings Inc rose 7.28, or 6.1%, to 126.06. A Deutsche Bank analyst raised his price target on Nymex, saying even if the exchange is not bought, it can cut costs and raise prices.

MGM Mirage rose 6.62, or 8.9%, to 80.94 on its deal with Dubai World.

Rio Tinto rose 14.87, or 6.1%, to 259.40 after closing its loan syndication, and Alcan rose 0.99 to 97.11.

The housing sector still appears far from recovery, even in the high-end market. Luxury homebuilder Toll Brothers Inc reported that its third-quarter profit tumbled, hurt by hefty write-downs and higher-than-expected cancellations. But the results were not as bad as Wall Street had anticipated, and Toll Brothers rose 1.06, or 5%, to 22.15.