Stock Prices Rise

Growing investor optimism supported by expectations of an imminent new reduction in key interest rates in the United States, along with a surge in energy prices and a recovery in financial stocks, resulted in an increase in the value of the most important global stock market indices last week.

The New York Dow Jones index rose by 0.6 percent on a weekly basis, to 13,896 points. The S&P index strengthened by 0.1 percent, to 1,527 points. The technology Nasdaq closed trading on Friday at 2,702 points, gaining 1.1 percent. American stock indices also recorded gains on a monthly and quarterly basis. In September, the Dow jumped four percent, the Nasdaq 4.1 percent, and the S&P 3.6 percent – marking its best monthly performance since September 1998. In the third quarter, the Dow strengthened by 3.6 percent, the S&P by 1.6 percent, and the Nasdaq by 3.8 percent.

Weaker indicators from the largest world economy, primarily the unexpected drop in consumer confidence in September to its lowest level in nearly two years and the decline in sales of existing and new homes in August, support expectations of a new interest rate cut at the next meeting of the U.S. Federal Reserve in October. Lower borrowing costs imply greater corporate profits and increased personal consumption. "The outlook for the economy is somewhat gloomier due to new economic data, but the good news for investors is that this increases the likelihood that the Fed will cut interest rates again," said Hugh Johnson of Johnson Illington Advisors in Albany.

The market also reacted positively to the news of an agreement between workers and management of the largest American vehicle manufacturer General Motors (GM), which ensured a reduction in its operating costs. This agreement, which still requires approval from members of the United Auto Workers union, established a healthcare fund for workers to reduce treatment costs currently borne by the companies themselves. This will allow GM to transfer more than $50 billion of its healthcare obligations for retired workers to an independent trust, thus relieving its business. GM’s stock rose by 9.4 percent following the announcement of the agreement, while Ford Motor Company, which is expected to sign a similar agreement, strengthened by 6.5 percent.

The stock of investment bank Bear Stearns rose by 7.7 percent following a report in The New York Times that it is in negotiations to sell 20 percent of its stake to Warren Buffett and other investors. This news signaled to the market that investors are finding value in companies that have been affected by their exposure to the troubled subprime mortgage market. "When a sophisticated investor and the second richest man in the world is interested in Bear Stearns, it can signal that the company is on the verge of a turnaround. Financial stocks are lagging behind the rest of the market, and now Buffett is showing interest, which raises the value of all companies related to the financial sector," said Tom Sowanick, chief investor at Clearbrook Financial LLC.

The jump in the price of a barrel of oil by 3.2 percent due to concerns about supply security and the decline in the value of the U.S. dollar prompted an increase in the stock prices of the largest oil companies and those providing services to them. Thus, Exxon Mobil’s stock strengthened by 0.7 percent, and Schlumberger, the world’s largest oilfield services company, by two percent. On European exchanges, stock prices reached their highest level in the last seven weeks, primarily thanks to the surge in the banking sector. The London FTSE index rose by 0.2 percent on a weekly basis, to 6,467 points. The Frankfurt DAX strengthened by 0.9 percent, to 7,862 points.

Among the significant gainers was the Swedish banking group Nordea, whose shares jumped by 10 percent. The reason for their surge was a news report that its competitor SEB would express interest in purchasing the Swedish state’s stake in this banking group when it is sold. SEB’s shares rose by 3.3 percent. In the banking sector, shares of the troubled British mortgage bank Northern Rock also strengthened, which was forced to turn to the Bank of England for emergency assistance earlier this month. With a jump of 6.3 percent, it was the biggest winner on the London Stock Exchange. Analyst Justin Urquhart Stewart from Seven Investment Management stated that there are signs of a return of investor confidence in the stocks of financial institutions. "Serious investors are returning to investments in stocks of this sector. However, we must not be overly optimistic – we are surrounded by dangers and expect new interest rate cuts in the short term," he said.

European stocks have strengthened by almost 8 percent since mid-August when they reached their lowest levels in eight months, after the U.S. Federal Reserve lowered the U.S. discount rate in response to the crisis in credit markets stemming from difficulties related to subprime mortgages. The Tokyo Stock Exchange Nikkei index strengthened by 2.9 percent during this period, to 16,786 points. (H)