Reports that all countries using the euro could get their credit ratings downgraded deflated a morning rally in the stock market Monday. The Dow Jones industrial average closed up 78 points, giving back much of a 167-point gain from earlier.
News reports in the afternoon said Standard & Poor's would put all nations that use the euro on "creditwatch negative," meaning there is a 50-50 chance of a downgrade in the coming months. S&P had warned of possible rating demotions for many of the countries. The inclusion on the list of Germany, Europe's strongest economy, was the biggest surprise.
After the market closed, S&P confirmed that it had placed 15 nations on notice for possible downgrades. Two countries that use the euro weren't affected: Cyprus already had that designation and Greece already has ratings low enough to suggest that it's likely to default soon anyway.
Stocks rose in the morning after the leaders of France and Germany called for a new treaty to impose greater fiscal discipline on European countries. Yields on Italian government bonds receded sharply after the new government of Mario Monti introduced sweeping austerity measures over the weekend. That suggests traders believe Italy is less likely to default.
"There's pent-up demand, and people will use any excuse to get back in, thinking there's been too much pessimism," said Brian Gendreau, investment strategist with Cetera Financial Group. Despite strong signals about the U.S. economy, the market has been weighed down by negative headlines about the U.S. budget impasse, credit-rating downgrades of the U.S. and other nations, and Europe's spreading crisis, Gendreau said.
The Dow Jones industrial average rose 78.41 points, or 0.7 percent, to 12,097.83.
The gains were broad. All 10 industry groups in the Standard & Poor's 500 index rose. Financials stocks were among the biggest winners. Investors have feared that U.S. banks might be dragged down by their close connections to the unstable European financial system.
JPMorgan Chase & Co. jumped 3.7 percent, the most in the Dow. Bank of America was the second-biggest gainer, 2.7 percent. Citigroup Inc. rose 5.9 percent, Morgan Stanley 6.8 percent.
The S&P 500 rose 12.8, or 1 percent, to 1,257.1. The Nasdaq rose 28.83, or 1.1 percent, to 2,655.76.
Investors are hoping that a summit of European leaders on Thursday and Friday will produce concrete measures to prevent a messy breakup of the euro currency, which is shared by 17 nations. Markets have been jittery because of fears that the euro might disintegrate, causing a sharp recession in Europe that would spread through the world economy.
The main Italian stock index jumped 2.9 percent as Italian bond yields dropped to their lowest level in a month. The yield on the 10-year Italian bond plunged half a percentage point to 5.93 percent. It rose above 7 percent last month, a level at which other nations were forced to take bailouts. By comparison, bond yields in Germany, Europe's largest and most stable economy, are roughly 2 percent.
Analysts say bailing out Italy would be too costly and would hurt the credit standing of German and France, which have the strongest economies in the euro group.
Monday's gains follow the best week in more than two years for U.S. stock indexes. The S&P 500 rose 7.4 percent last week, the most since March 2009. The Dow jumped 7 percent, the most since July 2009.
In corporate news:
— Gannett Co. leapt 10.2 percent after the media company was upgraded to "buy" from "neutral" by analysts at Lazard Capital Markets.
— Incyte Corp. fell 2 percent after a Citigroup analyst downgraded the drug maker to "neutral" from "buy," saying its new blood-disease drug Jakafi might not work as a long-term treatment.
— SuccessFactors Inc. soared more than 50 percent after the company agreed to be sold to German software company SAP for $3.4 billion. SuccessFactors makes software specializing in human resources tasks. The deal is part of SAP's plan to compete with software rival Oracle Corp.