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Stocks Rally on Fed Hopes

Indexes jumped Tuesday amid investor expectations of an interest-rate cut at the central bank's Sept. 18 meeting

Stocks finished solidly higher Tuesday, buoyed by expectations that the Federal Reserve will ease rates at its Sept. 18 policy meeting. Also, some upbeat corporate news from Dow Industrials components General Motors (GM) and McDonald’s (MCD) likely lifted investor sentiment.

On Tuesday, the Dow Jones industrial average gained 180.54 points, or 1.38%, to 13,308.39. The broader S&P 500 index rose 19.79 points, or 1.36%, to 1,471.49. The tech-heavy Nasdaq composite index added 38.36 points, or 1.5%, to 2,597.47.

Market breadth was positive, with 24 stocks rising in price for each nine that declined on the NYSE. Nasdaq breadth was 21-9 positive.

The market’s interest-rate hopes were not stoked by anything Fed Chairman Ben Bernanke said in a speech Tuesday in Germany. Bernanke didn't comment on current conditions, which left analysts wondering whether his silence meant he saw no need to challenge the market's expectations for a rate cut.

The consensus, according to Standard & Poor's MarketScope, is that policymakers are leaning toward a 0.25 percentage point cut in the federal funds rate, vs. a half-point cut that at least some on Wall Street are hoping for.

So far, Fed commentaries "almost uniformly suggest that the Fed is less prone to entertain a more aggressive policy trajectory than some market participants assume," wrote Michael Englund of Action Economics.

Investors Tuesday were also watching economic data for signs of how much the ongoing credit crunch is hurting the U.S. economy.

In July, the U.S. trade deficit narrowed but June's number was revised to show it widened slightly. The deficit was $59.2 billion in July, down from June's $59.4 billion, which was $58.1 billion previously. Imports rose 1.8% and exports climbed 2.7%.

A U.S. Manpower survey of hiring expectations for the fourth quarter released Tuesday suggests few changes in hiring plans vs. the third quarter. The services, mining and public administration sectors were strongest and construction and finance industries were weakest. The northeast U.S. showed weakness, while the West showed the strongest reading. The survey comes after Friday's August jobs report surprised and disappointed many on Wall Street.

Widespread worries about a credit crunch and an economic slowdown don't seem to be putting a dent in corporate profits. According to Reuters Estimates, earnings of companies on the S&P 500 index rose 8.7% in the second quarter, more than expected. Bright spots were health care, up 13%, and technology, up 14%.

Analysts now expect earnings to grow only 3.7% in the third quarter, but that hasn't changed much from earlier in the year. While expected earnings for financial stocks have fallen, expectations for energy firms have risen along with energy prices, says Ashwani Kaul of Reuters Estimates. For the fourth quarter, analysts expect a rebound to 12.1% growth.

Oil prices hit a fresh record Tuesday. October West Texas Intermediate crude gained 76 cents to finish the session at $78.25 after hitting an all-time high of $78.37 in New York trading. Prices slipped on the back of OPEC's decision to raise production by 500,000 barrels per day in November, though with market hopes set for a 1.0 million barrel increase, crude bulls eventually took the upper hand, notes Action Economics.

Gold prices are soaring after topping $700 an ounce last week. On Tuesday, December gold futures rose $8.90 to $721.10 an ounce and spot gold climbed $9.37 to $712.47. Commodities experts say gold, which often moves along with fluctuations in the U.S. dollar and oil prices, is rising because of demand for gold jewelry ahead of major holidays in developing countries like India.

Among stocks in the news on Tuesday, McDonald's reported its same-store sales were 7.4% higher in August in the U.S., and 8.1% higher worldwide. Shares were up more than 3%, leading both the Dow and S&P 500 indexes.

General Motors shares gained 4.6% after the automaker's Europe Chief, Carl-Peter Forster, speaking at the Frankfurt auto show, said there is a "good chance" the company could sell 300,000 vehicles in Russia next year, a 20% increase above 2007 expectations.

Countrywide Financial Corp. (CFC) shares fell 1.9%. The New York Post reports the mortgage company, dealing with the credit crunch and the decline in the housing market, is assembling another multi-billion-dollar bailout.

ImClone Systems (IMCL) and Bristol-Myers Squibb (BMY) were both higher Wednesday after they announced success for phase three studies of Erbitux, a drug that fights non-small cell lung cancer. Bear Stearns reportedly upgraded ImClone to outperform from peer perform. ImClone shares surged 18%, while Bristol logged a more modest rise of 0.8%.

Western Digital Corp. (WDC) raised its first quarter revenue forecast by $150 million, and its earnings expectations by almost 40%.

United Retail Group (URGI) agreed to be bought by Redcats USA in a $198.9 million deal. United Retail reported earnings of 16 cents per share in the second quarter, vs. 49 cents a year ago on a 1% drop in same-store sales. Total sales rose 1.1%.

Dollar Financial Corp. (DLLR) shares surged after reporting earnings of 48 cents per share, vs. 37 cents a year ago on 26% higher revenue.

European stocks rallied Tuesday. In London, the FTSE 100 index rose 2.39% to 6,280.7. Germany's DAX index moved up 1.12% to 7,457.90. In Paris, the CAC 40 index was up 1.72% to trade at 5,478.94.

In Japan, the Nikkei index rose 0.71% to 15,877.67. In Hong Kong, the Hang Seng index edged down 0.2% to 23,952.24. The volatile Shanghai composite index plunged 4.51% to 5,113.97.

Treasury Markets

Treasury prices fell Tuesday, reversing recent gains. Fed Chairman Bernanke gave no hints about monetary policy in a speech in Germany. This prompted those who had bought in anticipation of signs the Fed would cut the federal funds target at the FOMC meeting next week to sell. The 10-year note fell 11/32 to 103-04/32 for a yield of 4.36%. The 30-year bond eased 05/32 to 105-22/32 for a yield of 4.64%.

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