Wall Street gains for third day as stimulus hopes rise

NEW YORK (Reuters) - U.S. stocks extended a rally for a third day on Tuesday as sharp gains in oil prices lifted energy shares and traders factored in increased expectations for central bank stimulus.

A raft of weak economic data has raised hopes that the European Central Bank will cut interest rates to a record low on Thursday in a move that could drive stock markets higher and further lift commodities like oil and copper.

Tuesday's gains came on a shortened trading day before the July 4 Independence Day holiday when U.S. markets are closed. Trading volume was the lowest of the year at 3.78 billion shares on the NYSE, Nasdaq and AMEX.

Brent crude oil topped $101 a barrel for the first time in three weeks as tension over Iran increased concerns about threats to supply and as investors bet on further policy action.

U.S. crude was up $3.50 at $87.25 a barrel. The S&P's energy stocks sector was the top gainer, up 2.2 percent.

Eric Kuby, chief investment officer at North Star Investment Management in Chicago, said that last week's European summit, which sparked the rally with measures to ease the bloc's crisis, has raised expectations that policymakers globally are waking up to the need to support financial markets and the economy.

"We have been in rally mode," he said. "It's hard to buy into the actual economic numbers as really moving the market as they seem to be so dwarfed by the this whole global liquidity situation."

The Dow Jones industrial average .DJI gained 72.43 points, or 0.56 percent, to 12,943.82. The Standard & Poor's 500 Index .SPX rose 8.51 points, or 0.62 percent, to 1,374.02. The Nasdaq Composite Index .IXIC added 24.85 points, or 0.84 percent, to 2,976.08.

The euro rallied, climbing to a session peak as investors positioned for the European Central Bank policy meeting.

Major automakers also posted stronger-than-expected sales gains in June.[ID:nL2E8I31O3] Shares of Ford Motor Co (F.N), General Motors Co (GM.N) rose on the news. Ford gained 2.2 percent to $9.60 while General Motors rose 5.6 percent to $20.67.

The S&P 500 has gained 3.4 percent over the last three sessions, its best such run since December. The move has lifted the S&P 500 out of a recent trading range of 1,350-1,360, meaning stocks could advance to a higher range, according to analysts at Brown Brothers Harriman.

Stocks posted their biggest one-day gain of the year on Friday after European policymakers said EU emergency funds could be used to buy bonds of debt-stricken countries.

Microsoft Corp (MSFT.O) shares rose 0.7 at $30.76 on Tuesday. The company said its purchase of aQuantive, its largest acquisition in the Internet sector, was effectively worthless and wiped out any profit for the past quarter.

The Commerce Department said new orders for manufactured goods rose 0.7 percent during May. Economists had forecast orders rising 0.2 percent.

Trading volume is likely to start building up before the Labor Department's report on nonfarm payroll jobs for June on Friday.

"Investors have to be prepped for one of two outcomes on Friday. Our baseline is at or below the consensus 90,000 (jobs) figure, in which case more stimulus is on the cards. The risk is a bigger number that leaves a 30-point air-pocket above the current market level," said Andrew Wilkinson, chief economic strategist at Miller & Co in New York.

A report on Monday showing U.S. manufacturing contracted in June for the first time since July 2009 boosted speculation that the Federal Reserve will announce a third round of asset purchases to stimulate growth. A decision could come as early as the central bank's next policy meeting on July 31-August 1.

The U.S. Justice Department is probing Chesapeake Energy Corp (CHK.N) and Encana Corp for possible collusion after a Reuters report showed that top executives of the two rivals plotted in 2010 to avoid bidding against each other in Michigan land deals, a source close to the probe said. Chesapeake shares were up 3.4 percent at $19.36.

U.S. investment management firm BlackRock (BLK.N) is buying Swiss Re's (SRENH.VX) European private equity and infrastructure fund of funds franchise, it said on Tuesday.

(Additional reporting By Angela Moon, editing by Kenneth Barry)