Sign up to myFT Daily Digest to be the first to know about Merrill Lynch & Co Inc news.
Wall Street stocks enjoyed an exuberant start to the fourth quarter on Monday as the Dow soared to a new record high in spite of an earnings warning from Citigroup.
The Dow Jones Industrial Average climbed as high as 14115.51 before settling at an all-time record close of 14087.55. The previous record was 14,000.41, set in July.
Investors continued to favour large-cap stocks with exposure to larger international economic growth and which might benefit from a weaker dollar, traders said.
Since the Dow’s record close on July 19, Procter & Gamble and Coca-Cola have outperformed other stocks on the index, up about 13 per cent and 8.5 per cent, respectively.
The S&P 500 closed 1.3 per cent higher at 1,547.03, 0.4 per cent off its July record close. The Nasdaq Composite again set a new high for the year, closing 1.5 per cent higher at 2,740.99 as technology stocks continued their surge.
Financial stocks enjoyed a strong day in spite of a warning from Citigroup that its third-quarter earnings would probably fall 60 per cent as it faces writing down more than $3bn in subprime, leveraged loan and fixed income credit exposure.
Citi’s shares climbed 2.3 per cent to $47.42 as investors were cheered by assurances that a “normal earnings environment” would return in the fourth quarter.
The shares had fallen 16 per cent this year prior to Citi’s earnings warning.
Fitch Ratings affirmed Citi’s AA+ rating and said: “Mark to market charges on leveraged finance exposures (including commitments) were in line with general expectations.”
There was more troubling news for the banking sector after UBS said it would write down $3.4bn in the third quarter due to problems stemming from the subprime mortgage crisis.
However in spite of their chastening content the two banks’ disclosures provided a lift to the sector as traders were pleased to receive some clarity on exposure to credit and mortgage market problems.
The S&P investment bank index climbed 2.8 per cent to 207.94 points, as financial stocks posted the biggest gains among the S&P’s 10 leading sectors.
Merrill Lynch was 3.6 per cent higher at $73.87, while Lehman Brothers gained 3.1 per cent to $63.65.
“Everyone’s expecting bad news but, once it’s out, it’s either not as bad as everyone thought or at least it’s out in the open,” said Richard Sparks, senior equity analyst and equity options trader at Schaeffer’s Investment Research.
“The expectation is still that there will be a rate cut when the Federal Reserve meets at the end of this month. The market has decided that it is going to happen.”
In economic news, the Institute for Supply Management’s index of manufacturing activity in September fell from 52.9 in August to 52, slightly weaker than expected.
A reading above 50 still indicates an expansion in activity. The ISM’s employment sub-index ticked up to 51.7 last month from 51.3 in August.
“The strength of this sub-index suggests that not only will the September payrolls report rebound, but also that the August figure was anomalously weak and will be revised higher,” said TJ Marta, fixed income strategist at RBC Capital Markets.
Inflation concerns moderated after the ISM’s prices paid index fell from 63 to 59.
The most significant economic data to come are the September payrolls figures due at the end of the week. Investors expect a rebound in job creation after the decline of 4,000 for August – the first fall in four years.
“We continue to expect overall payroll employment to be up 125,000 in September and look for little change in manufacturing jobs,” said Ted Wieseman, economist at Morgan Stanley.
Homebuilder stocks rose sharply on Monday after an analyst at Citi Investment Research said recent share price falls meant it was time to buy into the sector.
“The steepness of the group’s recent decent, current valuations, and the overall magnitude of the decline in industry volumes are not unprecedented, but rather have reached their historic limits,’’ wrote Stephen Kim, analyst.
The S&P homebuilder index climbed 5.1 per cent to 430.23. Pulte Homes put on 8.7 per cent to $14.79 while DR Horton climbed 5.1 per cent to $13.46.
Get alerts on Merrill Lynch & Co Inc when a new story is published