The U.S. government decided to haul out some powerful -- and expensive -- weapons Friday to combat the financial crisis that has shaken Wall Street and the U.S. financial system.
U.S. stock indexes finished sharply higher Friday, one day after a dramatic market rally spurred by late news of government efforts to address the crisis that has gripped financial markets around the world. Indexes were off session highs as some traders took profits before the weekend, but the S&P 500 still erased its decline for the week.
On Wall Street, the financial sector led the way as the government announced a giant multi-billion dollar plan to resolve the nation's financial crisis, protect investors in money market funds, and absorb some bad real estate debt.
Bonds fell in price, while the dollar index was slightly lower. Gold futures were lower. Oil futures were higher.
On Friday, the blue-chip Dow Jones industrial average climbed 368.75 points, or 3.35%, to finish a remarkable week at 11,388.44. The broader S&P 500 index gained 48.57 points, or 4.03%, to end at 1,255.08. The tech-heavy Nasdaq composite index jumped 74.80 points, or 3.40%, to close the session at 2,273.90.
Action in the broader market was strongly positive. On the New York Stock Exchange, 28 stocks gained in price for every three that fell. The ratio on the Nasdaq was 17-7 positive. Trading was heavy, reports S&P MarketScope, amid quadruple witching expiration of options and futures.
The VIX equity volatility index, which hit a six-year high of 42.16 on Thursday, bounced from opening lows of 27.95 to the 31.0 area as the widely followed market "fear gauge" attempted to find fresh equilibrium. "The systemic financial crisis of 2007-08 reached an extreme yesterday according to this price action, as that level of panic was matched by the overwhelming use of force by the government to quell the run on the U.S. banking system," says Action Economics.
"We think evidence of a climax bottom this week, and an initial low for the bear market, were overwhelming," says S&P chief technical strategist Mark Arbeter.
Major indexes in Europe vaulted sharply higher. In London, the FTSE 100 index jumped 8.84% to 5,311.30. In Paris, the CAC 40 index climbed 9.27% to 4,324.87. Germany's DAX index was a relative laggard, rising 5.56% to 6,189.53.
Asian markets finished trading Friday with big rallies. Japan's Nikkei 225 index rose 3.76% to 11,920.86. Hong Kong's Hang Seng index rocketed higher by 9.61% to 19,327.73. China's CSI 300 Index surged by a record 9.3%.
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke revealed efforts to craft a massive rescue plan to buy up dodgy assets held by troubled banks and other financial institutions at the heart of the nation's financial crisis. Congressional leaders said they expected to get the plan Friday and act on it before Congress recesses for the election.
Bloomberg reports options that U.S. officials are considering include establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the Federal Deposit Insurance Corp. to insure investors in money-market funds, said two people briefed by congressional staff. They spoke on condition of anonymity because the plans may change. Another possibility is using Fannie and Freddie, the federally chartered mortgage-finance companies seized by the government last week, to buy assets, one of the people said.
The Securities and Exchange Commission early Friday imposed a temporary emergency ban on short-selling of financial company stocks, a trading method that bets the stocks will go down. As the financial crisis widened, entreaties had come from all quarters to stem a swarm of short-selling contributing to the collapse of stock values in investment and commercial banks.
The U.S. Treasury Department announced a massive program to shore up the nation's money-market mutual-fund sector, responding to concerns that the global financial crisis is starting to affect those historically safe assets.