Stocks closed solidly higher as investors took encouragement from more than $10 billion of announced acquisitions.
The Dow posted a triple-digit increase, its biggest gain in two weeks. Buying ran across the board with all the S&P 500 sectors trading higher. Investors put money to work in the energy, materials and beaten-down financial sectors. Advancing shares outpaced declining shares on the New York Stock Exchange by more than three to one.
"We think the one-day drop of a week or so ago was way overdone," Bob Turner, chief investment officer at Turner Investment Partners, told CNBC. "The trend that's been in place over the last several years of an upward bias to the market is still in place. So really any weakness presents a good buying opportunity."
"It's merger Monday madness, but some of it may be a reversal of the options expiration that took stocks down on Friday," Marc Pado, U.S. market strategist at Cantor Fitzgerald, told CNBC.com. "The fact that the financials are doing so well is a big relief for many. However, this is still part of a consolidation, so don't get too excited."
"Good markets tend to retest highs, and we could be in the process of retesting those highs over the next couple of months," said Steve Goldman, chief market strategist at Weeden & Company. "I think it's interesting that there's all these concerns about an economic slowdown, yet secondary stocks are holding up well. Technology stocks, which tend to buckle in a lot of volatility, haven't buckled. I think, structurally, the market is in good shape here."
The Federal Open Market Committee meets for two days this week, with its decision on interest rates coming Wednesday. The market is pricing in a 98% chance of the overnight lending rate staying at 5.25%. Investors will be closely watching housing starts data on Tuesday and the Fed's comments on Wednesday.
"The market wants to hear the Fed's most current assessment of this subprime mortgage situation and what the impact is going to be on the broader economy," Bill Strazzullo, chief market strategist at Bell Curve Trading, told CNBC.
"This is a paralyzed Fed we've learned not to expect to do anything," Adam Lass, Market Analyst at WaveStrength Options Weekly, told CNBC.com. "I think the Fed will say the subprime lenders are bad people who are suffering from doing bad things. The question is how far is this going to spread, but the Fed will say there's nothing it can do."
In the only economic news of the day, the monthly sentiment index released by the National Association of Home Builders showed builders were less optimistic about the housing market in March. The index fell to 36 in March from a downwardly revised 39 in February. This was the first decline in the index since September. Builders were concerned about the effects of the subprime shakeout on future home sales.
Blackstone Group, along with Carlyle Group and Riverstone Holding are mulling a counter bid to the $32 billion buyout for TXU , Reuters reported. But any new offer above the already record-breaking deal could face opposition from politicians and environmental groups, Reuters reported.
Community Health Services announced it will acquire Triad Hospitals for $54 a share in cash, or roughly $6.8 billion, including $1.7 billion of debt. The offer scuttles a $4.5 billion private equity buyout.
Private equity firm Clayton, Dubilier and Rice announced a $4.7 billion acquisition of home services company ServiceMaster .
Infrastructure contractor Quanta Services said it has agreed to buy InfraSource Services in an all-stock deal valued at $1.26 billion.
"The real positive news is that the M&A activity continues at a feverish pace, which reinforces the notion that the world is flush with liquidity, and some very smart people still see value," Ted Weisberg, president of Seaport Securities, told CNBC.com. "My guess is that things will quiet down by midweek and we'll be looking not so much to see what the Fed will do, but what they say."
Treasury prices fell, sending yields higher. Bond traders were concerned about inflationary pressures in the economy eating into the value of fixed-income investments.
Newcastle Investment said it has agreed to buy a $1.7 billion portfolio of 7,300 subprime mortgage loans. The company didn't name the seller but said it expects the deal to close within the next month.
"Vultures are needed in any eco-system," Arthur Cashin, UBS director of floor operations, told CNBC. "Picking things up for pennies on the dollar can recycle, but what we need to find out is whether they're thinking about carrying the mortgages, reinstating the mortgages or simply foreclosing and taking over all the property. That would have a different impact."
"There are always buyers at a price, but the issue right now is it too late to staunch the collateral damage," said Quincy Krosby, chief investment strategist at The Hartford. "I think the what market is bracing for - if the collateral damage erodes the overall economy, GDP and more over, confidence in liquidity."
New York light crude futures fell below $57 a barrel on continuing concerns about the U.S. and global economies. A decision by OPEC oil ministers to maintain present production output also appeared to weigh on oil prices.
Deals Also Dominate European Trading
The FTSE-100 in London, the Frankfurt DAX and the Paris CAC-40 all closed higher on M&A activity
In the banking sector, Britain's Barclays is expected to confirm press reports that it is holding preliminary merger talks with Dutch bank ABN AMRO, a deal that could create a global bank worth $156 billion. Activist investors are pushing for a sale or breakup of ABN, while a deal would give Barclays greater worldwide retail presence.
Germany's tourism group TUI announced it will merge with Britain's First Choice Holidays, creating a new company called TUI Travel. TUI will own 51% of the new company. Details on price are expected to come later.
Imperial Tobacco said over the weekend it will continue to push for a friendly takeover of Franco-Spanish tobacco company Altadis, which rejected a $15.3 billion offer last week.
Tokyo Rises; Australia Up on M&A
In Asia, China's central bank lifted interest rates for the third time in less than a year in an effort to put a lid on credit and investment in the world's fourth-largest economy. While no rate changes are expected in Japan and the U.S., investors are keen for clues to future policy action by the respective central banks.
Tokyo's Nikkei 225 Average closed over 1.5% higher topping the 17,000 level for the first time since March 13, as exporters such as Kyocera advanced after the dollar rose more than a yen from the day's lows. The Nikkei also drew support from a rebound in China's main share index to a positive territory after its fall of more than 2% at the opening following China's interest rate rise.
South Korea's Kospi Index also ended over 1% higher, brushing off early concerns over weaker U.S. markets and a Chinese rate hike, powered by rallies in shipbuilders, banks and some technology titles including LG.Philips LCD.
Australia's S&P/ASX 200 Index finished higher, shedding earlier losses after a US$2 billion takeover bid for Bendigo Bank sparked hopes of more deals in the sector, while mining stocks rose on stronger base metal prices.
Stocks in Hong Kong and Shanghai shrugged off the Chinese interest rate hike. Traders in Shanghai said the 0.27% increase had been expected.
Singapore's Straits Times Index rose over 1% as investors scooped up bargains in beaten-down blue chips such as Singapore Telecommunications.