Stocks poised to push September rally into fourth week as traders eye upcoming Fed meeting

By Stephen Bernard, AP
Monday, September 20, 2010

Stocks set to extend rally ahead of Fed meeting

NEW YORK — Stocks were set to extend their September rally into a fourth week Monday as traders eye the Federal Reserve’s meeting later in the week.

There is a growing expectation the Fed’s rate-setting committee might relaunch programs to buy Treasurys and mortgage bonds in an effort to further stimulate the struggling economy. At the very least, it might hint at future plans to make such moves.

While many economic indicators have topped economists’ forecasts in recent weeks, propelling stocks higher, the economy is far from strong. A move to start buying bonds again could drive interest rates lower, freeing up companies and consumers to get cheaper loans. It also could make Treasurys, a traditionally safe investment, less attractive because yields on the bonds could drop further. If investors aren’t happy enough with returns on bonds, that could force them to look for better returns in riskier assets like stocks and commodities. Treasury prices were little changed Monday.

The Fed had a similar bond-buying program in place earlier this year and the economy grew at a faster rate then compared with the past few months when it wasn’t making any purchases.

Key housing reports throughout the week will also be closely scrutinized. Home sales initially tumbled after a federal home buyer tax credit expired at the end of April, but have started to stabilize. Weak housing has been a primary reason the recovery remains slow. Reports are due out on home construction and sales of new and existing homes this week.

There are no major economic reports due out Monday.

Ahead of the opening bell, Dow Jones industrial average futures rose 31, or 0.3 percent, to 10,569. Standard & Poor’s 500 index futures rose 3.60, or 0.3 percent, to 1,123.30, while Nasdaq 100 index futures rose 7.00, or 0.4 percent, to 1,959.75.

Stocks started the month with a big surge, but have lately been climbing at a slower, steadier pace. The monthlong rally is especially surprising because September is historically a terrible month for stocks.

Investors are encouraged enough by the economic reports modestly beating forecasts to send stocks higher because it has lessened fears the economy might fall back into recession. Major reports on manufacturing and jobs have been the primary drivers of the market. If the Fed were to start buying bonds it could quell fears of a second recession even more.

The Dow has risen three straight weeks and is up 5.9 percent for the month. But it’s still 5.3 percent below its high for the year and up only 1.7 percent for the year.

Bond prices barely budged as investors await word Tuesday from the Fed. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.73 percent from 2.74 percent late Friday.

The dollar weakened against foreign currencies as expectations grew for the central bank to start buying bonds again.

Overseas, Britain’s FTSE 100 rose 1.1 percent, Germany’s DAX index gained 0.5 percent, and France’s CAC-40 rose 0.8 percent. The Japanese stock market was closed Monday.

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