Stocks closed higher across the board as investors were cheered by stronger housing data but remained cautious ahead of tomorrow's Federal Reserve decision on interest rates.
"Right now the market is pricing in an almost 75% probability that we're on hold for the rest of the year," Stan Jones, managing director at Dutch Book Partners, told CNBC. "That's a big change from where we were two weeks ago," when more people were expecting a rate cut sometime this year.
Buying was broadly based with all of the S&P 500 sectors in the green. Defensive plays helped utilities and consumer staples finish among the top performing sectors, but a rise in the beaten-down financials sector, in particular, helped to keep sentiment positive.
"I think we're seeing investors getting increasingly comfortable that the liquidity environment will remain fairly intact," Mike Malone, equity sales & trading analyst at Cowen, told CNBC.com. "I see investors returning to the market with a little more confidence."
The Commerce Department said housing starts rose 9% in February, the sharpest month-over-month increase since January 2006. Groundbreaking on new homes was expected to have risen by 3%, while issuing of permits was expected to fall by 0.7%, according to economists surveyed by CNBC and Dow Jones. Building permits actually fell by 2.5%.
"The lift we're seeing is a feel-good effect from the housing starts," said Kevin Caron, market analyst with Ryan Beck. "The starts suggest improvement in the housing market, but I think the ultimate concern is what happens to supply. A surge in starts actually creates additional inventory that has to be sold."
The market has been particularly sensitive to housing data, with concerns that defaults in subprime mortgages could spread to the rest of the housing sector and dent the U.S. economy.
Treasury prices were higher, sending yields lower.
In addition to the housing data, takeover announcements were in focus.
Jewelry and accessories retailer Claire Stores said it has agreed to be acquired by private equity firm Apollo Management for $33 per share, or about $3.1 billion.
Venture firm Carlyle Group is in discussions to sell two of its aviation buisnesses to Dubai Aerospace Enterprise for more than $1.5 billion, according to the Wall Street Journal.
An investment group that includes the founder and chairman of Affiliated Computer Servicesis offering $5.93 billion in cash to take the company private. ACS Chairman Darwin Deason said he has teamed with Cerberus Capital Management to make the bid of $59.25 per share. The stock rose sharply.
Citigroup , which is funding the leveraged buyout of ACS, was one of the best performing Dow stocks and it helped to boost the financial sector.
Shares of Palm rose after the technology news Web site, Unstrung.com, said a buyout could be finalized by Thursday of this week. The report said Palm could be sold for at least $20 per share and Nokia is seen as the leading bidder, although Palm's management is said to prefer a private equity buyer.
Subprime lender Accredited Home Lenders Holding , trying to avoid a cash crunch, said on Tuesday it had received a five-year, $200 million loan with an annual interest rate of 13%. Shares surged more than 20%.
And in the energy market New York light crude futures traded higher, but remained below $57 a barrel in volatile trading.
European Stocks Finish Higher
London's FTSE-100 reversed earlier lows. The Frankfurt DAX and the Paris CAC-40 also closed higher.
There's speculation that Britain's Imperial Tobacco could go hostile with its $15.3 billion bid for Franco-Spanish tobacco company Altadis, Reuters reported, citing analysts. Imperial Tobacco fell, while Altadis gained.
And private equity firm CVC Capital Partners said it is talking to Austrian steelmaker Boehler-Uddeholm about a friendly takeover.
Tokyo Leads Asian Markets
Tokyo's Nikkei 225 Average closed higher as Fanuc climbed after it bought about 2.6% of its own shares. Shares in exporters such as Toyota Motor also advanced the yen retreated further against the dollar.
In South Korea, the Kospi Index ended steady as sustained buying in some technology and financial companies offset sales from investors who booked profits in recent outperformers.
Australia's S&P/ASX 200 Index closed higher, the second straight session of gains, boosted by a strong performance on Wall Street and other Asian markets, with top miners and banks leading the rise.
Hong Kong stocks climbed, boosted by gains on Wall Street, as China Mobile jumped on the eve of its earnings report while China's Intime Department Store surged in its debut.
Singapore stocks rose to their highest levels in about a week and most Chinese stocks were also higher.