US stocks chalked up modest gains on Monday, led by energy and technology companies, helping offset worries about the threat of new turmoil in credit markets.
Oil companies attracted buyers as the price of crude reached its highest level in a month and tech stocks were buoyant after Yahoo rejected Microsoft's takeover bid, raising the prospect of a higher revised offer. Retailers moved higher as traders looked to buy into sector weakness.
Insurance companies came under pressure after American International Group (NYSE:AIG) dramatically increased its estimate of credit derivative losses, adding to concerns about further writedowns in the financial sector.
The S&P 500 closed up 0.6 per cent at 1,339.12 having fallen 0.8 per cent early on. The Nasdaq Composite rose 0.7 per cent to 2,320.06 and the Dow Jones Industrial Average put on 0.5 per cent to 12,240.01.
Yahoo's board formally rejectedMicrosoft's $31-a-share offer as inadequate, threatening to trigger a heated takeover battle.
Some analysts said the debate might now be one about price and that Yahoo might find it difficult to reject a higher offer. Microsoft is preparing to target Yahoo's shareholders directly, the FT reported. Yahoo's shares rose 2.3 per cent to $29.87. Microsoft fell 1.2 per cent to $28.21 after RBC Capital Markets cut its price target from $40 to $31.
In a sign of further consolidation in the tech sector The Wall Street Journal said Motorola (NYSE:MOT) and Nortel Networks were in discussions about a possible merger of their wireless infrastructure units. Motorola rose 2.8 per cent to $11.57. Nortel fell 1.6 per cent to $10.89.
Apple rose 3.2 per cent to $129.45 after Citi Investment Research added it to a preferred list on valuation grounds. It has fallen more than 34 per cent this year.
After a stellar run last year, energy stocks have failed to ignite in 2008, falling an average of 11 per cent, as worries about margin pressures and waning US demand have grown.Peabody Energy (NYSE:BTU) enjoyed the best of Monday's gains, climbing 4.9 per cent to $56.52.
Chevron, up 1.5 per cent at $80.43, joined ExxonMobil as a member of the Dow Jones Industrial Average. Bank of America was also elevated to the blue-chip average in place of Altria (NYSE:MO) and Honeywell (NYSE:HON).
The changes were the first since April 2004 and are set to apply from February 19. Honeywell, an industrial conglomerate, fell 0.3 per cent to $57.64 and Altria, which is in the process of spinning off its international tobacco business, fell 0.9 per cent to $72.42.
Dow Jones' substitutions reflected the growing importance of oil and gas to the global economy.
A broad range of financial stocks remained under pressure as risk indicators pointed to elevated tension in credit markets.
AIG's shares slumped 11.7 per cent to $44.74, their lowest point in almost five years, after the insurer's auditors found "material weakness" in the reporting of fair valuation of its credit insurance portfolio.
"AIG came out and reminded everyone of the continuing problems in credit markets and the financials," Ryan Detrick, senior technical strategist at Schaeffer's Investment Research, said
Having updated its valuation model AIG said the gross cumulative value decline in October and November of credit default swaps linked to collateralised debt obligations was almost $5bn, compared with a previous estimate of just over $1bn.
Standard & Poor's cut its equity recommendation on AIG from "buy" to "sell" and Fitch Ratings put the insurer on watch for a possible credit downgrade.
The S&P financial index extended last week's fall of 8.6 per cent, its biggest decline since the aftermath of the September 11 attacks in 2001, as fears grew that corporate and commercial property defaults were set to rise. Investors were also gripped by worries that the market for leveraged loans - used to finance Wall Street deal-making - is also showing signs of stress.
Bank of America Securities cut its first-quarter earnings estimates on US brokers prompting Lehman Brothers (NYSE:LEH) to fall 3 per cent to $58.25. Credit card issuers were also battered after Fox-Pitt Kelton cut its rating on the sector. Capital One Financial (NYSE:COF) fell 4.4 per cent to $46.82.
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