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Stocks pare gains but still post third straight rise on Europe hopes

September 27, 2011 |  1:51 pm

Markets27-blog 

U.S. stocks ended broadly higher Tuesday but surrendered a big chunk of their gains by the closing bell amid new rumors out of Europe.

The Dow Jones industrial average rose for a third straight session, finishing up 146.83 points, or 1.3%, to 11,190.69 after rallying as much as 325 points by midday.

Share prices pulled back in the final 90 minutes after London’s Financial Times reported that some Eurozone countries were pressing for Greece’s private bondholders to take bigger haircuts on the debt as part of any new workout plan for insolvent Athens.

That risks throwing yet another wrench into negotiations to keep Greece from melting down and taking the rest of Europe with it.

Stocks and commodities worldwide had rocketed overnight on optimism that European authorities were getting closer to a framework for staving off a deeper financial crisis on the continent. German Chancellor Angela Merkel pledged again to support Greece and preserve the Eurozone, though she faces broad opposition in Germany to a proposed expansion of Europe’s rescue fund for troubled member states. A vote on the fund is set for Thursday in the German parliament.

European stock markets staged sharp rebounds after their drubbing of recent weeks. The German market soared 5.3%, Swedish shares surged 6.2% and the Spanish market jumped 4%.

Commodities rose on hopes that progress in Europe would damp fears about a new global recession. U.S. oil futures rose $4.21 to $84.45 a barrel. Gold rebounded $58.10 to $1,650.60 an ounce.

But Dan McMahon, veteran trader at Raymond James & Associates in New York, warned against reading too much into Tuesday’s rallies, noting that some of the gains stemmed from “short covering” by traders who had been betting that prices would continue to slide in the near term. As stocks and commodities jumped instead, short-sellers faced pressure to jump in and close out their bets.

On Wall Street, traders said some money managers were selling bonds and buying stocks as part of quarter-end portfolio rebalancing strategies: With bonds appreciating while stocks have sunk this quarter, rebalancing requires managers to pare their bond stakes while adding to stocks. The quarter ends Friday.

As bond prices fell the yield on the bellwether 10-year Treasury note rose to 1.98%, up from 1.90% on Monday and the highest since Sept. 16. The yield had plunged to as low as 1.72% on Thursday, a day after the Federal Reserve said it would shift its massive bond portfolio more toward longer-term securities and away from shorter-term issues.

Stock market bulls say the biggest positive about this week’s trading is that the U.S. market has once again held above its summer lows -- suggesting that many investors and traders don’t see the economic outlook justifying another big breakdown in share prices.

Despite the wild volatility of the last few months, the Dow is down just 3.3% year to date. The Standard & Poor’s 500 index, which rose 1.1% on Tuesday to 1,175.38, is off 6.5% year to date.

By contrast, most major stock indexes in Europe, Asia and Latin America have suffered double-digit percentage declines this year. For example, Germany is down 18.6%, Hong Kong is down 21.3% and Brazil is down 22.2%.

It may not feel like much consolation, but "we've been the outperformer this year," Gail Dudack, head of Dudack Research Group in New York, said of U.S. equities.

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-- Tom Petruno

Photo: A trader works on the floor of the New York Stock Exchange. Credit: Reuters.

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