Stocks Gain On Microsoft Ruling, Rate Cut

Rate cut optimism and an appeals court decision to reverse the Microsoft break-up ruling boosted the major averages

Stocks finished Thursday higher with some help from Microsoft Corp. (MSFT ), a Dow component, which gave the market a lift following a trading halt. The halt came on news that an appeals court reversed a court order to break up the software giant. Investors also viewed the Fed's modest rate cut as a sign that the worst is over for the economy.

When trading in Microsoft resumed at 2:50, shares changed hands feverishly. The U.S. Court of Appeals said in its ruling: "Although we find no evidence of actual bias, we hold that the actions of the trial judge seriously tainted the proceedings before the District Court and called into question the integrity of the judicial process." Judge Thomas Penfield Jackson was removed from the case. The court vacated the breakup order and assigned the case to a different trial judge on remand.

"The case was substantially narrowed today, and we will continue to work toward resolving the remaining issues expeditiously," the company said in a statement.

Optimism that the Fed's smaller-than-hoped-for rate cut of 25 basis points spells an economic recovery reigned along with a surprise drop in this week's jobless claims provided additional fuel for Thursday's runup. Still, investors are expected to become more tempered in their buying as they realize that aggressive easing so far has had little effect on improving corporate profits.

"This time of year tends to be seasonally strong going into the Fourth of July holiday," says Scott Fullman, vice president and options strategist at Swiss American Securities, adding that end of quarter portolio adjusting is also underway. Fullman noted that the rate cut is not going to be particularly effective in sparking growth, but psychologically it buoys investors. "We need to watch volume carefully. It's going to dry up. And focus will soon turn to second-quarter results."

Another piece of Fed data for investors' consideration: The central bank released meeting minutes from its May 15 meeting at which the Board of Governors voted 9 to 1 in favor of a 50 basis point cut. At the time, the Fed Governors thought the slowdown was likely to be more prolonged than they had anticipated earlier. Still they saw inflation in check and viewed an upturn by later in the year as likely. And board members anticipated a shift to a neutral bias "before long."

Among other stocks in the news Thursday, Dow components General Electric Co. (GE ) and Honeywell International (HON ) rose as the companies attempted to save their long-anticipated merger with a proposal to divest 19.9% of its aircraft leasing arm to appease European regulators.

The Dow Jones Industrial Average ended higher by 131.37 points, or 1.26%, to 10,566.21. The Nasdaq Composite climbed 50.60 points, or 2.44%, to 2,125.34. Meanwhile, the broader S&P 500 index finished with a gain of 15.11 points, or 1.25%, to 1,226.18.

Treasury Market

U.S. Treasuries finished lower as stocks rallied.

In economic data, the latest unemployment claims data came in lower than expected, the second week claims have dropped unexpectedly. For the week of June 23 new jobless claims fell 16,000, to 388,000. Economists at S&P's research unit were looking for a rise to the 405,000 level.

In its policy statment issued Wednesday, the Fed said it remains concerned about declining profits, low business capital spending, weak consumer spending and lower growth abroad. But the rate-setting team is still confident that inflation is contained and remains focused on risks that are "weighted mainly toward conditions that may generate economic weakness in the foreseeable future."

Analysts say the Fed's language suggests the door is open for an additional rate cut when it meets again on August 21.

In the meantime, traders on Friday will seek direction from a slew of economic reports including the final first-quarter figure on GDP, and Michigan sentiment and Chicago PMI for the month of June.

World Markets

European stock markets ended higher on the heels of a Fed-sparked U.S. rally. In London, the Financial Times-Stock Exchange 100 index finished higher by 30.50 points, or 0.54%, to 5,638.40. In Germany, the DAX Index ended up 138.67 points, or 2.38%, to 5,971.77. In France, the CAC 40 ended up 75.84 points, or 1.50%, to 5,133.56.

Asian stocks finished mixed. Japan's Nikkei index shed 149.10 points, or 1.16%, to 12,679.88. In Hong Kong, the Hang Seng index lost 176.39 points, or 1.36%, to 12,827.82.

By Amy Tsao in New York

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