NEW YORK: U.S. stocks extended a rally for a third day on Tuesday as sharp gains in oil prices lifted energy shares and traders factored in increased expectations for central bank stimulus.
A raft of weak economic data has raised hopes that the European Central Bank will cut interest rates to a record low on Thursday in a move that could drive stock markets higher and further lift commodities like oil and copper.
Tuesday's gains came on a shortened trading day before the July 4 Independence Day holiday when U.S. markets are closed. Trading volume was the lowest of the year at 3.78 billion shares on the NYSE, Nasdaq and AMEX.
Brent crude oil topped $101 a barrel for the first time in three weeks as tension over Iran increased concerns about threats to supply and as investors bet on further policy action.
U.S. crude was up $3.50 at $87.25 a barrel. The S&P's energy stocks sector was the top gainer, up 2.2 percent.
Eric Kuby, chief investment officer at North Star Investment Management in Chicago, said that last week's European summit, which sparked the rally with measures to ease the bloc's crisis, has raised expectations that policymakers globally are waking up to the need to support financial markets and the economy.
"We have been in rally mode," he said. "It's hard to buy into the actual economic numbers as really moving the market as they seem to be so dwarfed by the this whole global liquidity situation."
The euro rallied, climbing to a session peak as investors positioned for the European Central Bank policy meeting.
The S&P 500 has gained 3.4 percent over the last three sessions, its best such run since December. The move has lifted the S&P 500 out of a recent trading range of 1,350-1,360, meaning stocks could advance to a higher range, according to analysts at Brown Brothers Harriman.
Stocks posted their biggest one-day gain of the year on Friday after European policymakers said EU emergency funds could be used to buy bonds of debt-stricken countries.
The Commerce Department said new orders for manufactured goods rose 0.7 percent during May. Economists had forecast orders rising 0.2 percent.
Trading volume is likely to start building up before the Labor Department's report on nonfarm payroll jobs for June on Friday.
"Investors have to be prepped for one of two outcomes on Friday. Our baseline is at or below the consensus 90,000 (jobs) figure, in which case more stimulus is on the cards. The risk is a bigger number that leaves a 30-point air-pocket above the current market level," said Andrew Wilkinson, chief economic strategist at Miller & Co in New York.
A report on Monday showing U.S. manufacturing contracted in June for the first time since July 2009 boosted speculation that the Federal Reserve will announce a third round of asset purchases to stimulate growth. A decision could come as early as the central bank's next policy meeting on July 31-August 1.
Wednesday afternoon Reuters reported from Tokyo:
Asian shares rose to a seven-week high on Wednesday as investors kept hopes high for more monetary policy stimulus to support the faltering global economy, starting with a likely rate cut by the European Central Bank.
European shares looked set to marginally extend gains after closing at a two-month high on Tuesday, with spreadbetters predicting that region's major markets would open up 0.1 percent.
U.S. markets are closed for the Independence Day holiday.
Japan's Nikkei average added 0.5 percent.
"The market seems to be riding high on a wave of central bank easing expectations, with traders now largely expecting action from the Chinese, ECB and the Bank of England," said Chris Weston, a dealer at IG Markets in Melbourne.
The ECB is expected to cut its main refinancing rate to a record low below 1 percent at its policy meeting on Thursday.
It has two other interest rates - the marginal lending rate that banks use for emergency overnight borrowing and its deposit rate that acts as a floor for the money market - and money market traders are evenly split on whether the ECB will cut the deposit rate.
The euro stood at $1.2590, well below Friday's high of $1.2693, with traders expecting the single currency to consolidate between $1.2560/1.2660 ahead of the ECB decision.
Few expect the ECB to take other measures, such as reactivating the bank's bond-buying plan - a tool that could effectively cap borrowing costs in highly-indebted states.
"The ECB is likely to cut its main refinancing rate strictly in response to the deteriorating economy, but markets could be trying to link a growth strategy agreed by the European leaders last week to look for an additional easing option," said Takao Hattori, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
"Monetary policy focus is shifting to economic fundamentals, and the way markets are warming up to riskier assets, it appears they are anticipating more easing also from the United States as well as Japan."
As risk appetite warmed, the commodity-linked Australian dollar rose 0.2 percent to $1.0298, also underpinned by Australia's retail sales outpacing expectations in May.
GOLD/BRENT RATIO EYED
Expectations of further accommodation from the ECB and/or an announcement to increase quantitative easing by the BoE on the same day "are all examples of market-friendly events, propping equities and favoring oil relative to gold", said Ashraf Laidi, chief global strategist at City Index.
A decline in the ratio measuring the price of gold relative to the price of Brent crude has in the past been positive for global risk appetite, he said, noting that each time since April 2009 the gold/Brent ratio neared 17.0 equities had stabilized before pushing higher.
The ratio recently fell below that mark to around 16.10, near levels reached in early June when markets had been bolstered by similar hopes for monetary stimulus.
Spot gold was down 0.1 percent at $1,615.69 an ounce but stayed near a two-week high hit on Tuesday.
Easing risk aversion boosted Asian credit markets, with the spread on the iTraxx Asia ex-Japan investment-grade index narrowing by 7 basis points.
But doubts remained over the sustainability of the current positive sentiment towards riskier assets, as Europe faces the next phase of crisis-management when euro zone finance ministers convene on July 9 for their monthly meeting.
They will hammer out details of last week's agreement allowing rescue funds to be used to stabilize bond markets and directly help recapitalize stricken banks, but Italy said a second meeting on July 20 may be needed to persuade all countries to sign up to the arrangement.
A final agreement for European aid of up to 100 billion euros ($125.84 billion) for Spanish banks is due on July 9, but it may also be delayed until July 20 to allow more time for negotiations, two sources close to the talks said on Tuesday. - Reuters
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