MarketView for June 1

Summary   

Stock prices were sharply higher on Monday, sending the S&P 500 to its best close in seven months, as the latest economic data reinforced the possibility that demand will stabilize. At the same time General Motors' long-expected bankruptcy filing ended uncertainty with regard to the company's fate. The S&P 500's gain on Monday marked its highest close since last November, and the Dow climbed to its highest finish since January. The Nasdaq had its highest close since October 2008.

The broad-based advance extended the stock market's recovery from the 12-year closing low of March 9, with the benchmark S&P 500 now up about 40 percent since then. In addition, the S&P  hit another psychologically important milestone, ending above its 200-day moving average for the first time since December 2007.

The latest economic reports indicated that the manufacturing sector contracted in May at a slower rate than had been expected, fueling expectations that the recession, while not over is at least moderating and has quite likely bottomed out.

There were also some encouraging signs of manufacturing stabilization in China, with demand from emerging markets for commodities and other resources seen leading a revival of global growth. China's manufacturing sector expanded moderately in May as new export orders improved, two surveys showed, adding to tentative signs the world's third-largest economy was stabilizing.

Monday’s top performers included Boeing, up 6.4 percent to $47.70, and United Technologies, up 5.1 percent to close at $55.27. Shares of energy companies were also on an upswing, with Chevron closing up almost 4 percent at $69.21 as July crude oil futures climbed $2.27 to settle at $68.58 per barrel. Exxon Mobil ended the day up 3.5 percent, to close at $71.76.

Shares of other natural resources companies also gained. Alcoa was up 6.6 percent, closing at $9.83, while Freeport-McMoran gained 6.8 percent to close at $58.12.

As expected, General Motors filed for bankruptcy on Monday, marking an historic fall from grace for a storied American corporation. The filing eliminated some market uncertainty about the future of the automaker that has received billions of dollars in government money to stay afloat.

Following the bankruptcy filing, Dow Jones has said it will remove the company from the Dow Jones industrial average and replace it with by Cisco Systems. Citigroup will also be deleted, with Travelers taking its place.

Cisco was one of the largest gainers on the Nasdaq, rising 5.4 percent to $19.50, while Travelers gained 3.1 percent to $41.91 on the Big Board. GM shares ended unchanged at 75 cents, a day before their suspension by the NYSE, while Citigroup slipped 0.8 percent to $3.69.

Treasurys Fall Sharply

The price of Treasury securities fell sharply on Monday, ending yields bounding upwards as improving sentiment on the economy sapped demand for government debt. Improving economic reports, higher oil prices and a resurging stock market helped the Treasury market resume a sell-off that began late last month.

The demand for Treasurys was already in a decline over concerns that the volume of government debt coming to the market as Washington finances its massive financial and economic stimulus programs will overwhelm the ability and desire of the markets to absorb it.

As a result, the yield on the 10-year Treasury note, a widely used benchmark for home mortgages and other kinds of loans, jumped to 3.70 percent from 3.46 percent late Friday as its price fell 1 28/32 to 95 8/32. Last Wednesday the yield on the 10-year bond hit a six-month high of 3.75 percent.

Bond prices had recovered late last week following solid demand for debt at several Treasury auctions, but could not hold on to their gains Monday amid the upbeat economic data, a sinking dollar and higher oil prices.

A weaker dollar and higher oil prices are especially worrisome for the bond market because they signal the potential for inflation, which would erode the value of a bond's fixed returns over time.

Meanwhile, stocks rallied on Wall Street on positive reports on manufacturing, construction and consumer spending, which further pressured Treasury prices. As investors' appetite for risk increases, stocks and other riskier assets become more appealing than government bonds, which are usually seen as safe-haven investments.

There is a school of thought that says rising bond yields are a natural progression when the economy is on the mend. However, there is also the fear that a huge spike in yields, which are a benchmark for interest rates on mortgages and other consumer loans, could curb purchases of homes, cars and other big-ticket items and undermine an economic recovery.

The yield on the 30-year bond jumped to 4.54 percent from 4.34 percent as its price fell 3 2/32 to 95 10/32. At the same time, the yield on the two-year note rose to 0.98 percent from 0.93 percent, as its price fell 3/32 to 99 25/32. The yield on the three-month Treasury bill dipped to 0.11 percent from 0.13 percent.

The cost of borrowing between banks fell to another record low. The British Bankers' Association said the rate on three-month Libor fell 0.01 of a percentage point to 0.65 percent. The rate has been steadily falling for most of the past month on hopes that the worst of the recession is over.

ISM Factory Index Above Expectations

The nation's manufacturers continued to cut back production in May, but not as rapidly as during the worst of the downturn, the Institute for Supply Management reported Monday. The ISM index rose to 42.8% in May from 40.1% in April. The rise exceeded expectations in addition to being the strongest gain since September. Readings below 50 indicate contraction. The index has been below 50% for 16 straight months. The ISM index has been improving slowly since hitting a low of 32.9 in December. A key sub-index, new orders, rose to 51.1% in May.

Construction Spending Rises

According to a report released by the Commerce Department on Monday morning, construction spending rose 0.8 percent in April, an unexpected gain and the most since last August, marked the second straight month that builders increased spending on construction projects around the country. Before the March upturn, construction spending had fallen for five straight months.

Looking at some of the details, private builders increased spending on housing projects by 0.7 percent, contributing to the overall improvement in April. It marked the first time since August that private home builders boosted such spending. At that time, they increased it 5.5 percent.

Private spending on projects other than residential chalked up a strong 1.8 percent gain in April, coming on the heels of March’s 2.6 percent gain.

Builders increased spending in April on projects including hotels and motels, factories, power plants and health care facilities. That increase more than offset reductions in spending on office buildings, amusement and recreation projects and on other projects. However, spending by the government fell 0.6 percent in April, reflecting spending cuts on schools, hospitals and other health-care buildings, including sewer and water-supply projects.

Crude Oil Jumps Sharply

The price of crude oil rose more than 3 percent, coming close to a seven-month high over $68 per barrel on Monday  Domestic sweet crude for July delivery settled up $2.27per barrel at $68.58, the highest settlement since November 4, after reaching $68.68 during intraday activity. London Brent crude settled up $2.45 to settle at $67.97 a barrel.

Further support came as the dollar fell to the lowest level this year, boosting investor demand for oil and commodities. Saudi Oil Minister Ali al-Naimi said during the weekend that OPEC would wait until crude inventories fall to around 53 days of forward cover before considering raising output, nearly 10 days below current levels.

The head of the International Energy Agency (IEA) said global oil demand may not have bottomed out yet but could still recover by the end of 2009 if the economy gets back on track.