Oil Declines, and Markets Push Higher

Continuing a rally that began Thursday afternoon, shares on Wall Street rose Friday in response to a decline in oil prices, speculation that Lehman Brothers might be sold and expectations that the federal government would soon reaffirm its support of the troubled mortgage giants Fannie Mae and Freddie Mac. 
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The Dow Jones industrial average was up 180 points, or 1.58 percent, early Friday afternoon, and the S.&P. 500-stock index rose 0.91 percent. The Nasdaq was up 1.2 percent. 

Light sweet crude oil was down $3.78 to $117.40 a barrel after surging more than $5 on Thursday. Given that energy prices have been the main driver of record-high inflation over the last few months, the dropping oil price helped relieved market-wide fears.

The prices of other commodities, including gold and corn, also fell on Friday after climbs earlier this week.

“As I look at the markets, we’re going up one day, down the other day,” said Edward Rombach, derivative markets analyst at Thomson Reuters. “Gold and oil go up and the dollar goes down, and the reverse happens the next day. The swings are pretty big.” 

The dollar strengthened against the euro Friday, climbing 0.7 percent to $1.4796 per euro, from $1.4899 on Thursday.

Speculation that the troubled brokerage firm Lehman Brothers might be bought by the Korea Development Bank was taken as good news by investors wary of the shock waves that have rippled through the financial sector. Lehman rose $1.76 to $15.48. Its stock price has fallen about 76 percent over the last year.

“After what happened with Bear Stearns, there were concerns that Lehman might be the next shoe to drop,” said Alec Young, equity strategist at Standard & Poor’s Equity Research, referring to a Fed-engineered buyout of Bear Stearns by its rival JPMorgan Chase in March. “The possibility that something might be happening with Lehman is helping stabilize things, since one firm’s state can have a broad effect on the entire market.”

Other banks stocks were also slightly higher. Morgan Stanley rose 1.9 percent; Citigroup was 0.5 percent higher; and Merrill Lynch, 0.58 percent. 

Analysts said the markets had also gotten a lift from rumors that Treasury officials might soon make a speech reaffirming their guarantee of Fannie Mae and Fannie Mac. Rumors about a forthcoming statement along these lines have been swirling for several days and strengthened on Thursday afternoon.

“The spreads coming in now are an indication that the market believes, and that it would be the logical next step, that Treasury explicitly backs Fannie and Freddie,” said Quincy Krosby, chief investment strategist at The Hartford. “They are too big to fail. They are the epicenter of the meltdown.” 

A tempered speech Friday from the Federal Reserve chairman Ben S. Bernanke indicating that the Fed was not likely to raise interest rates anytime soon also buoyed investors.

“The recent decline in commodity prices, as well as the increased stability of the dollar, has been encouraging,” Mr. Bernanke said. “If not reversed, these developments, together with a pace of growth that is likely to fall short of potential for a time, should lead inflation to moderate later this year and next year.” 

Mr. Bernanke hedged his words by saying that “the inflation outlook remains highly uncertain.”

Friday’s stock rally has led some analysts to give optimistic views of the near future.

“The combination of good news today and the fact that the market appeared to be sold out yesterday leads me to believe that at least for the near term we’ve got a sold out market,” said Bruce Bittles, chief investment strategist at R.W. Baird & Company. “The news that we’re getting on commodity prices and financials is not new, so those who are looking to sell on that have already done so.”