Stocks rallied across the board and the Dow put in its best one-day performance of the year following strong economic data and a decline in bond yields.
"The market has been oversold and people were focusing on rates but then the market started looking a little cheaper and we had buyers come in today," said Todd Leone, head of listed trading at Cowen and Co. "People are obviously focused on the ten-year, which has come off a bit."
The Dow Jones Industrial Average rose 187 points, or 1.4%, the blue chip index's best one-day gain since July 2006. The move highlights a volatile week for stocks. The Dow on Tuesday closed 129 points lower after wild swings, and on Monday it closed barely changed after moving in a wide 184-point range.
"We have had an awful lot of volatility in stocks and bond markets over the last week," said Bill Strazzullo, chief market strategist from Bell Curve Trading. "Right now, we see things as a range, we don't see a lot of downside."
The S&P 500 advanced 1.5%, the benchmark index's fourth move of 1% or more in the last five days. The Nasdaq Composite lagged the other major averages but still closed up 1.3%, the tech heavy index's best daily performance since March.
The Federal Reserve said U.S. economic activity expanded from mid-April through May. The central bank's latest Beige Book report of anecdotal economic conditions indicated modest or moderate growth that rose at a relatively faster rate in recent months with little concerns regarding inflation.
Equity investors continued to focus on the fixed income market as the yield on the 10-year Treasury eased after rising to five-year highs on Tuesday.
"This has been a big change," said David Tice, portfolio manager of The Prudent Bear Fund. "The 10-year is up 70 basis points. This is essentially equivalent to three rate hikes within 30 days."
Breadth was positive on Wednesday with advancing stocks leading decliners by more than four to one on the NYSE. All 10 S&P sectors closed higher, led by basic materials and utilities, which each ended up more than 2%. Aluminum manufacturing giant Alcoa led gains among Dow 30 components, closing up 2.9%.
In corporate news, Caterpillar rose more than 2% after the maker of construction equipment reaffirmed full-year sales and earnings guidance. The company projected 2007 earnings in a range of $5.30 to $5.80 a share on sales of $42 billion and $44 billion.
Intercontinental Exchange improved its offer for CBOT Holdings Tuesday by allowing CBOT shareholders to chose up to $2.5 billion in cash instead of ICE shares. The move is an attempt to block the Chicago Mercantile Exchange Holdings bid to take over the parent of the second largest U.S. futures exchange.
New York light sweet crude futures closed higher after the Energy Information Administration said gasoline inventories were unchanged last week. Crude rose 1.4% to $66.26, and is up 8.5% year to date.
Wall Street cheered new economic data released this morning which showed strong consumer spending trends despite higher gasoline prices and slumping home sales.
The Commerce Department said retail sales in May surged by 1.4%, the largest increase in 16 months. Sales were only expected to rise by 0.6% last month, according to economists. Import prices rose for the fourth straight month, by 0.9%, on higher petroleum costs. Business inventories rose in April by 0.4%, compared with being unchanged in March.
"We were sort of distracted by a pretty good earnings period without paying too much attention to inflation," said Joseph Benanti, head trader at Rosenblatt Securities. "Now that earnings are out of focus, inflation really is in focus. I think that's going to be the highlight of the next couple of weeks."
European Stocks Close Higher
European shares traded higher in sync with the U.S. market.
The London FTSE-100, and Paris CAC-40finished higher, while the Frankfurt DAX reversed course to post a small gain as well.
In acquisition news, Barclays bank is preparing to improve its $86.74 billion offer for ABN Amro by freeing up more cash for the Dutch target to replace some of the shares currently offered, the Financial Times Reported. The overall value of the bid would remain the same, the paper said.
Meanwhile in Spain, a strong spring and summer collection helped fashion retailer Inditex beat the consensus forecast of analysts with a 33% rise in first-quarter net profit, compared to the same period a year ago. Shares in the company rose.
Also on the earnings front, Alliance & Leicester said it expects a 3.9% rise in full-year profit, which is at the top of previous estimates as the bank predicts a boost from mortgage lending. Shares of the company rose.
And lobby group the British Venture Capital Association (BVCA) is preparing to replace CEO Peter Linthwaite for failing to improve the negative image of the industry, according to London newspaper The Times.
Asian Stocks Slide
Asian stocks fell in the afternoon session Wednesday with Japan and Australia closing weak after U.S. Treasury yields shot to a new 5-year high. Investors are worried that strong global growth will send interest rates higher around the world, eating into consumer and corporate spending.
Expectations of a rebound the U.S. economy and that interest rates in Australia, China and Britain are set to rise following hikes in Europe and New Zealand last week have driven global bond yields higher.
Tokyo's Nikkei 225 Average closed lower as Mitsui Fudosan and
other property firms fell on concerns about rising interest rates, while a slide in metals prices hit metal shares. But the market received support from exporters such as Sony after the U.S. dollar struck a 4-1/2-year high against the yen.
South Korea's Kospi Index ended weaker as exporters such as Hyundai Motor were hit by worries that inflationary pressures would raise interest rates worldwide, slowing down economic growth. Lenders such as Woori Financial Group fell on caution that national interest rates would also be raised sooner than expected, although there is still considerable debate about whether monetary policy would be changed.
Australia's S&P/ASX 200 Index finished down as growing concerns that global interest rates would rise weighed down on financial stocks, while mining firms came under pressure after a slide in base metal prices.
China's Shanghai Composite Index jumped over 2% in heavy trading, suggesting share prices and turnover might be returning to levels which prompted government action to cool the market last month. It was the market's seventh straight daily rise, and brought the index just 4% off an all-time high hit on May 29, just before authorities hiked the stock trading tax to cool speculation. The tax hike caused the index to plunge as much as 21% over five days.
Hong Kong stocks pared early losses, helped by a strong rebound in mainland stock markets, with blue chip Foxconn looking set to stem its eight-day falling streak.