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The markets ended solidly to the upside, although well off of session highs, as traders grappled with media reports that Standard & Poor's warned several euro zone countries that they might get downgraded in the next three months.
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The Dow Jones Industrial Average rose 78.4 points, or 0.65%, to 12,098, the S&P 500 gained 12.8 points, or 1%, to 1,257 and the Nasdaq Composite jumped 28.4 points, or 1.1%, to 2,656.
Financial shares performed the best on the day, with big banks such as JPMorgan Chase (NYSE:JPM) and large investment banks like Morgan Stanley (NYSE:MS) zooming higher. Energy and material shares, such as Schlumberger (NYSE:SLB) and Freeport McMoran Copper & Gold (NYSE:FCX), posted solid gains a swell.
In contrast, healthcare shares like Johnson & Johnson (NYSE:JNJ) and consumer staples like Kraft Foods (NYSE:KFT) and Wal-Mart (NYSE:WMT) struggled.
After trading lower for most of the day, bond prices made a comeback, pushing yields lower. The benchmark 10-year note yields 2.035% from 2.037%.
With the docket of U.S. economic data fairly shallow on Monday, traders paid close attention to news from Europe, where leaders are racing to save the euro.
S&P plans on putting all 17 members of the euro zone currency bloc on "creditwatch negative," according to media reports citing unnamed sources. That would imply there is a 50/50 chance the ratings company will downgrade the countries' sovereign debt rating in the next 90 days. Included in the list are countries that presently hold a top-notch rating, including Germany and France.
The move may come shortly after the closing bell on Monday, the reports said. An S&P spokesman told FOX Business the company has no comment on the matter.
The report spooked market participants to some extent, pulling Wall Street well off of its highs of the session. Indeed, the Dow, which had been up as much as 167 points, closed only 78 points to the upside.
Earlier in the day, German Chancellor Angela Merkel and French President Nicholas Sarkozy met in Paris ahead of a key summit later in the week. The leaders of Europe's two biggest economies said they would like to create a treaty that forces countries to keep their fiscal houses or face sanctions if they fail. The heads of state also said they would prefer all of the European Union countries to agree to the measures, but would accept agreement by just countries in the smaller euro zone.
Investors are expecting European leaders to "come out with big guns blazing," Louise Cooper, a market analyst with BGC Partners, said in an interview with FOX Business, adding that they expect a "big" announcement following summit.
The hope is that if European officials create a system to make sure countries are keeping their debt inline, it will give the European Central Bank the ammunition it needs to launch a large bond-buying program to ease yields on embattled euro-zone sovereign debt.
The European Central Bank is the only institution that has the power to create euros, and is widely seen as a crucial player in tackling the crisis. The problem is the ECB doesn't want to increase the likelihood of repeating the crisis by bailing the system out without consequences for highly-indebted countries.
To that end, Italy's new government unveiled a roughly $40 billion austerity program on Monday that includes spending cuts, tax increases and reforms to the country's costly pension system. Italy is Europe's third-biggest economy, and has an enormous public debt burden. The specter that it may need a rescue like other heavily-indebted countries spooked the markets several weeks ago, and forced the ouster of its old government.
The country's 10-year bonds yield 6.39% presently, or trade at a 4.21 percentage-point premium to Europe's safe-haven German bund. That represents a considerable easing from just a week ago when yields topped the closely-watched 7% mark.
European blue chips jumped 1.2%, while the euro fell 0.26% to $1.3449, turning around on the reports regarding euro zone debt ratings.
The markets posted a blockbuster performance last week: the broad S&P 500 surged 7.4%, while the blue chips tacked on some 788 points.
On the U.S. front, data released on Monday showed factory orders fell by 0.4% in October from the month prior, slightly more than the 0.3% fall economists' anticipated. Excluding the transportation component, orders were up 0.2% on the month.
Meanwhile, a separate report showed the services sector expanded at a slower pace than expected last month. The Institute for Supply Management's gauge of the non-manufacturing sector fell slightly to 52 from 52.9 the month prior. Economists has forecast a reading of 53.5. Readings above the 50 mark point to expansion, while those below indicate contraction.
Energy markets were mixed. The benchmark crude oil contract traded in New York gained 12 cents, or 0.14%, to $100.83 a barrel. Wholesale RBOB gasoline fell 0.1% to $2.61 a gallon.
European blue chips jumped 1.2%, the English FTSE 100 gained 0.28% to 5,568 and the German DAX rose 0.68% to 6,106.
In Asia, the Japanese Nikkei 225 rose 0.6% to 8,696 and the Chinese Hang Seng gained 0.73% to 19,180.