Stocks made up a good portion of their losses from Friday today as all sectors rose. Stocks rallied as hopes are building for a resolution to the European debt crisis. Dow soars 272 points.
What is getting lost in all of the financial news lately is the rise of the dollar which is contributing to the fall of oil prices since barrels of oil are bought with the dollar on the foreign markets.
The unintended consequnces of the 'Twist' are that Money-market funds, often regarded as among the safest global investment vehicles, could soon get some much-needed relief thanks to the Federal Reserve's latest stimulus plan.
Here are the top financial stories of the day:
1) Stocks jump on hopes for a Europe fix; Dow up 272-From the AP
Stocks had their biggest gains in more than two weeks Monday after European officials pledged to take action to resolve the region's debt problems. The Dow Jones industrial average jumped 272 points, making up about a third of last week's losses.
European ministers told a meeting of global finance leaders in Washington over the weekend that they would take bolder steps to fight the debt crisis, which threatens to slow the global economy. President Barack Obama called on Europe's leadership Monday to move more quickly to address the problems.
Germany wants banks and private institutions that hold Greek bonds to take a bigger loss on those holdings to reduce Greece's debt burden. European officials have talked about increasing the size of Europe's $595 billion rescue fund by allowing it to take loans from the European Central Bank. Pressure is also mounting for the central bank to lower interest rates.
"The news leaking out of Europe is giving investors hope that the politicians and central bankers in Europe might be putting together a plan," said Channing Smith, managing director of Capital Advisors Inc. "The devil's in the details."
The Dow Jones industrial average shot up 272.38 points, or 2.5 percent, to close at 11,043.86. It was the biggest gain since Sept. 7. JPMorgan Chase & Co. jumped 7 percent to $31.65, the most of the 30 stocks in the Dow.
The Standard & Poor's 500 rose 26.52, or 2.3 percent, to 1,162.95. The Nasdaq composite rose 33.46, or 1.4 percent, to 2,516.69.
About three stocks rose for every one that fell on the New York Stock Exchange. All 10 industry groups in the S&P 500 rose.
Financial stocks had the biggest gains in the S&P 500, rising 4.4 percent. Banks have the most to lose if Europe's debt crisis gets worse, so investors picked up those stocks as hopes built that a resolution could be on the way. Huntington Bancshares Inc. rose 8.3 percent, SunTrust Banks Inc. rose 8 percent.
Berkshire Hathaway's Class B shares rose 8.6 percent after the company announced a plan to repurchase stock for the first since Warren Buffett took control in 1965.
Investors have been on edge about Europe's debt problems for months. The Dow plunged 6.4 percent last week, its biggest drop since the week ended Oct. 10, 2008 at the height of the financial crisis.
The market's volatility has made many investors nervous. Since the first week of August, the Dow has closed up or down more than 200 points a total of 16 times. There were only four swings of 200 points or more in the other seven months of 2011.
President Barack Obama said in a town hall meeting that Europe's financial crisis "is scaring the world" and that the actions the region's leaders have taken so far "haven't been as quick as they need to be."
Greece is at risk of defaulting on its debt next month if it does not receive the next installment of a bailout package. If that happens, banks that hold Greek bonds would lose money. Analysts also worry that the economies in Europe and the U.S. could slip into another recession.
News that sales of new homes in the U.S. fell to a six-month low briefly sent indexes lower in morning trading, but by midday Eastern the Dow and S&P were higher.
Boeing Co. rose 4.2 percent after the company delivered its first 787 aircraft to Japan's All Nippon Airways.
An analyst said the company's earnings should rise for the next few years if the aircraft maker is able to maintain steady production.
Clorox Co. fell 4.3 percent after Carl Icahn withdrew his proposal for a new slate of directors. That suggested the activist investor was unable to find a buyer for the consumer products company.
Eastman Kodak Co. plunged 26.9 percent after the company borrowed $160 million because most of its cash is deposited overseas. Some analysts took that as a sign that the company is running out of cash as it tries to reinvent itself in the era of digital photography.
Trading volume was a bit heavier than average at 4.5 billion shares.
2) Rising Dollar: Headwind for U.S. Growth-From The Wall Street Journal
A stronger dollar may actually bode further weakness.
The greenback has been on a tear lately, jumping more than 6% in the past four weeks to reach its highest level since January against a trade-weighted basket of currencies. Politicians may like to talk up a "strong dollar," but investors know that in fact a rising currency can be a head wind for economic growth and a drag on corporate earnings.
Moreover, sharp upward moves in the dollar tend to happen during periods of financial turmoil, as a side effect of the global flight-to-safety trade.
The dollar's current rally likely has further to run. For one, rival currencies like the euro and pound are under renewed pressure amid economic weakness and the resulting prospects for looser monetary policy in those regions.
Nomura Securities, for example, expects the euro will drop to $1.30 by year end, compared with a recent peak of $1.50 in early May. Meanwhile, the rout in commodities and jitters about global growth have killed investor appetite for formerly highflying currencies like the Australian and Canadian dollars.
Investors, then, can add the rising dollar to their growing list of headaches.
For the third quarter, which ends this week, it is clear companies in the Standard & Poor's 500-stock index won't see nearly as much benefit from currency translation effects as they did in prior periods. Credit Suisse strategist Douglas Cliggott points out that in the second quarter, the dollar was down about 16% year on year against the euro, which represents the biggest foreign market for the S&P 500. That helped companies in the index post a 19% gain in earnings per share from the same period a year earlier.
For the third quarter, the dollar is likely to be down only 7% to 8% against the euro. And if its rally continues, the dollar could wind up being stronger in the fourth quarter than it was a year earlier.
"We'll just get a lot less earnings support" from the dollar in the quarters ahead, notes Mr. Cliggott. The technology, industrial and consumer-staples sectors will be particularly sensitive to this.
Currency may be a small factor relative to other fundamentals in good times, but it takes on more importance in a low-growth environment.
Message to America's strong-dollar advocates: Be careful what you wish for.
3) Fed's 'Twist' May Help Money-Market Funds-From The Wall Street Journal
Money-market funds, often regarded as among the safest global investment vehicles, could soon get some much-needed relief thanks to the Federal Reserve's latest stimulus plan.
Conservative investors typically park their cash in these funds to make steady, albeit small returns. But the rewards have been meager the past several months because short-term government debt yields are so low.
The Fed's new accommodation effort, dubbed "Operation Twist," may lead to better results. The central bank's plan involves selling shorter-dated Treasurys over the next nine months, a move that is designed to push short-term debt prices lower and force yields, which move inversely to prices, higher.
Because money-market funds rely so heavily on short-term Treasury yields to generate returns, a boost of even one or two hundredths of a percentage point is a boon to managers who have been accepting bare-minimum interest all summer.
"It helps ease the supply-demand situation," said Debbie Cunningham, chief investment officer at Federated Investors in Pittsburgh. "It provides the basis for a more realistic money-market curve."
Gary Pollack, head of fixed-income trading at Deutsche Bank's Private Wealth Management, thinks two-year yields might tick up another 0.05 to 0.1 percentage point because of the Fed's plan.
Increasing fears over the summer about a euro-zone credit contagion and global economic slowdown set off an aggressive flight into safe-haven assets, boosting prices of U.S. Treasurys and dragging their yields to the lowest levels in history.
This crushed money-market funds, which are required to invest in the shortest-dated Treasury securities, called T-bills. On some recent occasions, the yields on these actually fell into negative territory, meaning investors had to pay just to lend their own money.
During July's U.S. debt-ceiling crisis, the government also cut back on its T-bill supply in order to avoid exceeding the country's legal debt limit. That added to the shortage that was already crimping money-market yields.
To be sure, some money-market managers say that until investors stop rushing into Treasurys, the relief spurred by the Fed's selling will be limited. "It'll put a bit more supply on the front end of the market, but the reality is that you can't even get enough of that paper in our world right now," said Joseph D'Angelo, head of the money-market desk at Prudential Fixed Income. As funds limit their exposure to European bank assets to alleviate investor concerns, T-bills are the only place left to invest.
Perhaps the bigger problem for these funds is Europe's credit crunch. Money-market funds invest heavily in European bank debt, a fact that is worrying investors who think the debt crisis will only get worse. Investors yanked $27.8 billion from global money-market funds in the past two weeks, according to global-fund tracker EPFR.
"There's now far fewer places to lend your money and be able to sleep at night," Mr. D'Angelo said.
But while money-market funds will at least benefit incrementally, the Fed's Twist could have unwanted side effects for banks and traditional long-term-bond investors. The central bank's long-term debt buying will push those securities' yields down, which compresses the amount banks can earn from making long-term loans.
Likewise, pension funds and insurance companies that rely on yields from long-term Treasury bonds will also feel a pinch.
The next milestone for money-market managers comes in October, when the Fed starts selling its shorter-dated debt. Many managers say they will be eager to scoop up whatever securities the Fed sells, hoping to pick up bills with more attractive returns, however puny they still are. "There's just humongous appetite for this risk-free paper," Mr. D'Angelo said.
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