Tech rise offsets inflation fears on Wall Street

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US stocks rose on Wednesday after strong results from Hewlett-Packard provided a boost to the technology sector and helped offset worries about rising inflation.

However, a late-session recovery seemed to have little in the way of a catalyst and analysts said programme traders may have been responsible for the swing.

Equities fell sharply in early trade as investors were unsettled by a bigger-than-expected jump in consumer prices. Stocks then rebounded, even as crude oil hit $101 a barrel, adding to inflationary worries but boosting energy companies.

Banks led the rally amid reports of a potential plan to restructure troubled bond insurers but telecoms stocks lagged the market on concerns that a price war could hit margins.

The S&P 500 closed up 0.8 per cent at 1,360.02 having earlier fallen 0.9 per cent. The Dow Jones Industrial Average swung more than 235 points intraday and settled up 0.7 per cent at 12,427.26. The Nasdaq Composite rose 0.9 per cent to 2,327.10.

“There’s not a whole lot of news to explain why we’re having these intraday swings. That worries me – it makes me think programme trading is moving the market,” Jeff Buetow, chief investment officer at XTF Global Asset Management, said.

Inflation fears were stoked after soaring food prices spurred a 0.4 per cent jump on January’s consumer price index. Economists had forecast only a 0.3 per cent rise. Core CPI, which strips out volatile food and energy inputs, rose 0.3 per cent, more than expected.

The CPI data raised concerns that the Fed may not be able to keep cutting interest rates to support a struggling US economy. The minutes from the Federal Open Market Committee’s January meetings revealed the Fed feared downside risks to growth had “increased significantly”, leading it to cut rates by an unprecedented 125 basis points in just eight days. The Fed lowered its 2008 economic growth forecast yesterday and said it also expected higher unemployment and inflation.

New data on US housing starts showed a modest increase in January, in line with expectations. However, building permits – an indicator of future construction intentions – fell 3 per cent. Homebuilder stocks rallied after the report with DR Horton up 8.1 per cent at $15.45.

Joe Kinahan, chief derivatives strategist at thinkorswim, said the market was now caught at important technical levels on both the S&P 500 futures contract and the CBOE Vix index, Wall Street’s so-called fear barometer. He said: “The Vix can’t seem to go below 25 and S&P futures can’t seem to go above 1,365.”

If the S&P can build momentum above this level, Mr Kinahan said it could presage a further significant move higher.

The Vix slipped 4.7 per cent to 24.39 on Wednesday even as indices that track the cost of buying insurance against corporate default set new record highs.

Technology companies chalked up the best of the gains after Hewlett-Packard’s fiscal first quarter earnings rose 38 per cent. The PC-maker also raised its full-year earnings outlook, and the stock jumped 7.9 per cent to $47.44. Chipmakers rallied strongly with the PHLX semiconductor sector index rising 2.6 per cent.

By contrast, telecoms came under pressure after Credit Suisse downgraded the sector and cut its ratings on Verizon Communications and AT&T from “outperform” to “neutral”. Verizon fell as much as 5.8 per cent but closed only 0.3 per cent lower at $35.24. AT&T fell 4.3 per cent to $34.36.

Financial stocks rallied in spite of heightened credit market tensions as hedge fund manager William Ackman submitted a proposal to restructure bond insurers threatened with credit downgrades. MBIA rose 4.1 per cent to $12.18.

Goldman Sachs forecast that Wachovia was likely to take a first quarter writedown in excess of $1bn. The shares rose 0.9 per cent to $34.08.

Solar shares fell after Suntech Power Holdings, down 12.3 per cent at $40.24, gave a first quarter revenue forecast that missed Wall Street’s expectations.

JC Penney was the standout retailer, rising 3.4 per cent to $47.95 after Citi Investment Research told investors to buy the shares.

But Whole Foods Market fell 1.8 per cent to $37.65 on concerns about expansion plans.

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