MarketView for February 7

Summary 

Merger activity drove the Dow and S&P to two-and-a-half-year highs on Monday in the latest in a series of mileposts that point to more gains ahead. Buying accelerated after the S&P 500 broke through the 1,313 mark, taking the index further into levels that prevailed before the financial crisis. However, the day's rise came on lighter-than-average volume with about 6.89 billion shares trading on the major exchanges, well below last year's daily average of 8.47 billion.

In a startling announcement, AOL has agreed to acquire The Huffington Post for $315 million. As a result, AOL ended the day down 3.4 percent to $21.19. Danaher agreed to buy Beckman Coulter in a  $6.8 billion deal. EnsCo Plc said it would buy Pride International for about $7.3 billion. Danaher ended the day up 2.2 percent to close at $49.03 while Beckman Coulter closed up 10 percent at $82.65. EnsCo ws down 4.2 percent to close at $52.13, while Pride International closed up 15.7 percent at $39.80.

The S&P is up 4.9 percent so far in 2011, adding to the gains it notched mostly in the latter half of 2010. The size and swiftness of the advance has prompted many analysts to call for a correction, though none has materialized. With the 1,313 level breached, stocks face little technical resistance until the 1,400 level on the S&P. Meanwhile, UBS raised its 2011 target for the S&P 500 index by 7.5 percent to 1,425 from 1,325, citing an improving outlook for the economy and earnings.

About 72 percent of S&P 500 companies that have reported results so far posted stronger-than-expected earnings, according to Thomson Reuters data.

Looking at commodities, copper rose to a record on supply concerns and improved sentiment of economic recovery. Rising commodity prices, along with another uptick in Treasury yields, once again brought out the inflation concerns. Those concerns about inflation reducing economic growth, combined with the political risk from Egypt, have been responsible for a shift in assets out of emerging markets and into developed economies.

World equities as measured by the MSCI All-Country World Index advanced 0.53 percent after gaining 2.2 percent last week. The index is up 3.4 percent so far this year, while the MSCI emerging markets index is down 2 percent.

The FTSEurofirst 300 index of top European shares closed at its highest level since September 2008, up 1 percent at 1176.81, supported by mining companies as copper hit a fresh record on supply concerns from top producer Chile.

Concerns over higher inflation in booming emerging markets, further indications of economic recovery gathering pace in the United States, modest valuations and tentative signs of stability in the euro zone sovereign debt crisis have fueled the outperformance of shares in developed markets.

The euro paired losses against the dollar after touching a two-week low, but downward pressure is likely to remain after a bigger-than-expected fall in German industrial orders emboldened the stance that euro zone interest rates will stay steady for a while.

The euro was flat at $1.3585 in late afternoon trade in New York. The dollar was unchanged against a basket of major currencies, with the U.S. Dollar Index flat at 78.04. Against the Japanese yen, the dollar was up 0.16 percent at 82.30.

Nagging worries the Federal Reserve is clinging to a near-zero interest rate policy for too long as inflation and the economy accelerate sent Treasury prices lower. The benchmark 10-year U.S. Treasury note was down 2/32, with the yield at 3.648 percent, while the 2-year U.S. Treasury note was down 2/32, with the yield at 0.7725 percent. Prices of the 30-year Treasury bond ended up 11/32, with the yield at 4.7078 percent, down from yield levels touched earlier in the day of 4.75 percent, levels not seen since last spring.

Copper backed off from a new record due to a higher dollar. However, concerns over supply, especially from top producer Chile, and a recent stream of positive economic data that boosted the outlook for industrial metals demand, combined to push commodities prices higher.

Tin also hit a record high on worries about supply problems in top exporter Indonesia.

Domestic sweet crude oil futures for March delivery fell 1.99 percent, to $87.25 per barrel, and spot gold prices ended flat at $1348.75 an ounce.