Stocks Jump on M&A, Falling Yields

The 10-year Treasury note yield's dip below 5.00% was a big boon for equities, along with deal news and manufacturing gains

The third quarter got off to a rollicking start Monday, with the Dow Jones Industrial Average logging three-digit gains on a combination of lower bond yields, stronger-than-expected manufacturing data, and a fresh wave of corporate takeover news, led by deals in the telecom industry.

A dip in the yield on the 10-year Treasury note below the 5.00% level may have provided the requisite psychological push to encourage money managers to put new money to work in equities. Bond yields have been drawing inordinate attention in recent weeks amid rising fears of inflation, which quieted down last Thursday with the Federal Reserve's decision to leave the Fed Funds rates unchanged at 5.25%.

"The stock market has been dancing to the bond market's tune" for weeks," says Joe Battipaglia, investment officer for Ryan, Beck & Co. "The bond market strength today set the background for stocks to move up. All it needed was good economic numbers, which was provided by the ISM data, and continued deal flow."

On Monday, the Dow Jones industrial average ended 126.70 points, or 0.95%, higher at 13,535.43. The broader S&P 500 index was up 16.08 points, or 1.07%, at 1,519.43.

The tech-heavy Nasdaq Composite index rose 29.07 points, or 1.12%, to 2,632.30.

Kicking off a cascade of economic data this holiday week is the Institute for Supply Management's manufacturing index for June. The ISM index rose to 56.0 in June from 55.0 in May as the manufacturing sector continues to expand after a contractionary reading in January, says Action Economics. The employment index and prices paid dipped, while new orders rose. The expansion was the strongest since April 2006.

Investors seemed to take worries about terrorism in stride. "Unfortunately. investors have become accustomed to occasional terror attacks," Battipaglia says. "If it happens to be non-strategic targets -- non–economic targets -- the markets essentially barely flinch."

The Dept. of Homeland Security said Sunday that the U.S. is increasing transportation security, including putting more air marshals on flights to Britain, citing worries of copy cat attacks after a car bombing at the Glasgow airport over the weekend.

In the energy markets Monday, oil resumed its move higher after overcoming early selling pressure from profit-taking ahead of the July fourth holiday. Oil pushed back above the significant $70 threshold, with August WTI crude oil futures finishing 41 cents higher at $71.09 a barrel. News of a U.K. investigation into the car bomb that went off at the Glasgow airport on Saturday has led to new speculation as to how significant a role the so-called terror premium is playing in current oil prices.

Terrorist efforts are having little effect on oil production worldwide, but may end up having a more noticeable impact on the demand side of the equation if people get paranoid enough to stop traveling, Phil Flynn of Alaron Trading said on CNBC Business News. He predicts oil will hit a seasonal peak in the mid $70s before backing off as the summer driving season wanes, as long as there are no supply-side shocks such as production disruptions from hurricanes in the Gulf of Mexico. Cooler-than-normal temperatures in the Northeast aren't helping oil prices, either.

Ignoring the strong ISM report, the U.S. dollar fell to a 26-year low against the British pound, which was up on talk that the Bank of England is about to raise interest rates.

Among stocks in the news Wednesday, Canada's largest telecom company, BCE Inc. (BCE), is being bought by a consortium of private investors for $48.5 billion, including $15.9 billion in debt. The price represents a 40% premium over where the stock traded in March before talk of a takeover started to push the stock higher. The shares were up 4.3%.

Wireless provider Dobson Communication (DCEL) jumped 11.8% on news it has agreed to be bought by AT&T (T) for $5.1 billion, including debt, or $13 a share.

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