Decline in Oil Prices Spurs Late Stock Rally
A late-session rally fed by falling oil prices pushed stocks mostly higher Wednesday, although Wall Street’s mood remained tentative amid uncertainty about the economy and the financial system.
The drop in oil prices -- coming as the government reported a larger-than-expected weekly rise in U.S. crude inventories -- removed a key obstacle for stocks to move higher. A barrel of light crude settled at $50.45, down $1.62, in New York trading.
A separate report showing that the U.S. trade deficit in March shrank to its lowest level in six months also encouraged investors, analysts said.
However, Michael Murphy, managing director at Wachovia Securities in Baltimore, noted that although the day’s economic and corporate news was generally good, news of late had been mixed. He said many investors were waiting for a clear signal to get into the market.
“People are very hesitant right now to pull the trigger,” Murphy said.
The Dow Jones industrial average rose 19.14 points, or 0.2%, to 10,300.25.
Broader stock indicators also moved higher. The Standard & Poor’s 500 index was up 4.89 points, or 0.4%, at 1,171.11, and the Nasdaq composite index gained 8.78 points, or 0.4%, to 1,971.55.
Advancing issues outnumbered decliners by 5 to 4 on the New York Stock Exchange.
Stocks slumped suddenly at midday, after the White House and the Capitol were evacuated because of an off-course aircraft. Once the plane was diverted away from Washington, the market began to slowly move higher.
Contributing to investors’ uncertainty were comments by Federal Reserve Bank of St. Louis President William Poole, a member of the Fed’s rate-setting committee. He was quoted by Dow Jones Newswires as saying that the Fed’s stated intent to raise rates at a measured pace “should not be viewed as an ironclad commitment.”
In the Treasury bond market interest rates ended little changed, even though demand was strong at the government’s auction of $15 billion in five-year T-notes. The notes were sold at a yield of 3.89%.
The Treasury today plans to sell $14 billion in 10-year notes. The yield on the existing 10-year T-note dipped to 4.20% Wednesday from 4.21% Tuesday.
In the corporate bond market investors remained skittish, in the wake of rumors Tuesday that some hedge funds last week had suffered heavy losses on bonds of General Motors and other issuers, after GM’s credit rating was downgraded to junk.
Those rumors helped to drive the Dow down 103 points Tuesday.
Junk bond prices continued to fall Wednesday, pushing their yields higher. The yield on an index of 100 junk issues tracked by KDP Investment Advisors rose to 7.73% from 7.69% on Tuesday.
Hedge funds, which control about $1 trillion in assets, often engage in complex trading strategies involving so-called derivative securities.
“The problem is when one of those particular strategies blows up, you’ve got everybody looking for the exits at the same time,” said Bill Strazzullo, chief equity strategist at State Street Corp. in Boston.
That raises the risk of a domino effect in the financial system, as losses cascade and big investors rush to raise cash.
In one sign that worries might be easing, major brokerage stocks rebounded somewhat Wednesday. They had been hammered Tuesday in part on worries about hedge funds, because many brokerages have close financial ties to the funds.
Goldman Sachs, which fell $3.39 on Tuesday, added $1.64 to $103.75 on Wednesday; Deutsche Bank, down $2.67 on Tuesday, gained 65 cents to $80.23.
Deutsche Bank said its trading unit had no exposure to hedge fund investments, distancing itself from rumors about possible losses.
“We don’t give cash lending to hedge funds,” the bank’s chief financial officer, Clemens Boersig, said at a UBS global financial services conference in New York.
Among the day’s highlights:
* Delta Air Lines’ battered stock fell 23 cents to $2.74, its lowest level in more than 32 years. The drop came after the company warned Tuesday about further losses and the possibility of bankruptcy.
Other airline shares were mixed. AMR, parent of American, was unchanged at $11.02; Continental fell 26 cents to $12.25.
* DreamWorks slid $4.45 to close at $32.05 after trading as low as $30.80. After regular trading ended Tuesday the studio reported first-quarter earnings that were well below analysts’ estimates.
* Cisco Systems, the largest maker of equipment that directs Internet traffic, added 34 cents to $18.55. The company reported better-than-expected earnings after the market closed Tuesday.
* United Parcel Service jumped $2.22 to $73.85 after maintaining its 2005 profit forecast for growth of 16% to 20%.
* Eastman Kodak, in the midst of a difficult transition as photography goes digital, rose $1.13 to $26.58 after it said Chief Executive Daniel Carp would step down in favor of his second in command, Antonio Perez.
