U.S. stocks topped off an uncommonly uptrending session on Monday with a last-hour surge, as optimism over Federal Reserve Chairman Ben Bernanke's endorsement of a second U.S. economic stimulus package combined with signs of loosening in the credit crisis and a handful of better than expected earnings reports to boost investor sentiment. Narrowing in credit market spreads suggests that the government's efforts to stabilize the banking system may be starting to work.
European stocks were higher as banks lined up to tap state rescue packages to shore up their finances, part of measures to stem a global financial crisis.
Bonds were slightly lower, with yields moving a bit higher. The dollar index was lower. Gold futures were sharply higher. Oil futures were up on speculation OPEC will cut output at emergency meeting.
On Monday, the Dow Jones industrial average finished 413.21 points, or 4.67%, higher at 9,265.43. The S&P 500 index gained 44.85 points, or 4.77%, to close at 985.40. The tech-heavy Nasdaq composite index rose 58.74 points, or 3.43%, to 1,770.03.
On the New York Stock Exchange, 27 stocks were trading higher for every five that were in negative territory, while on the Nasdaq the ratio was 21-7 positive. Volatility, as reflected by the Chicago Board Options Exchange volatility index, dropped 25% to around 52 from above 75 last week.
Energy and utility stocks led the market higher, fueled by a takeover bid for NRG Energy (NRG) by Exelon Corp. (EXC), analyst upgrades and better-than-expected earnings at oil service companies Halliburton (HAL) and Weatherford International (WFT). Financials and certain technology names, like Research in Motion (RIMM) underperformed, S&P MarketScope said.
Major European indexes were higher Monday. In London, the FTSE 100 index surged 5.41% to 4,282.67. In Paris, the CAC 40 bounced 3.56% to 3,448.51, while Germany's DAX index rose 1.12% to 4,835.01.
In Asia, Japan's Nikkei 225 jumped 3.59% to end at 9,005.59, while Hong Kong's Hang Seng index surged 5.28% to close at 15,323.01.
President Bush said over the weekend that he will host an international summit to discuss ways to fix the world financial system but warned against reforms that threaten capitalism. Meeting with French President Nicolas Sarkozy and European Commission President Jose Manuel Barroso at the Camp David presidential retreat, Bush didn't announce a date or site for the summit, but Sarkozy suggested it be held in the shadow of Wall Street before the end of November.
Governments continued to announce measures to shore up financial institutions. Germany's cabinet approved strict conditions for banks that make use of its €500 billion rescue package, including limits on managers' salaries, bonuses and severance. "The criteria for appropriate (remuneration) are based on responsibilities and personal performance, business conditions and the success and outlook of the company compared to others in its field," the provisions agreed by cabinet stated, according to a Reuters dispatch.
Bavaria's public sector bank, BayernLB, was ready to ask for funds, Bavaria's finance minister said. Commerzbank said it would take a close look at using the funds. Societe Generale led a steep fall by France's top three banks as concern heightened they may be next in line for state funds. On Sunday, the Dutch government agreed a €10 billion cash injection into financial group ING (ING), powering its shares higher by almost 23%. ING said it had agreed to sell its Taiwan Life insurance unit to Fubon Financial for $600 million, increasing its capital in a deal analysts said would benefit shareholders. In Sweden, the government outlined a plan worth more than 1.5 trillion crowns ($271.5 billion) that would include credit guarantees and a bail-out fund. "The government is proposing powerful measures to ease the effects on Swedish households and companies of the financial turbulence," said Financial Markets Minister Mats Odell.
Traders listened to Bernanke's testimony on the U.S. economic recovery to the House Budget Committee. Saying that uncertainties around the economic picture are unusually large, the Fed chief said it would be appropriate for Congress to pass a second fiscal package to stimulate growth. While recovery from what he expects to be a protracted economic slowdown will depend on how quickly confidence returns to the financial system, he said he was confident that the measures the government is taking would help restore people's trust in the financial system. He advised against a net tax increase while the economy is in a slowing mode.
More Fedspeak on Monday included remarks by Atlanta Fed President Dennis Lockhart, who said that while he thinks economic weakness will persist into 2009 as the economy faces a "vexing uncertainty," he doesn't see the U.S. facing a "lost decade" like Japan, due to the forceful response to the crisis.
Federal Reserve Board Governor Randall Kroszner, speaking to the Risk Management Association, said the current environment presents "fundamental challenges for banking institutions," and said they need to be prepared for regulatory changes. Risk management shortcomings need to be addressed, and a "risk management framework" needs to be developed, he said. But he didn't really speak on the current economic environment and there was no hint in his remarks as to whether or not the Fed's policy committee would cut interest rates further at its meeting next week, according to Action Economics.
Offering more detail about the Treasury's plan to inject $250 billion into banks, Secretary Henry Paulson said the the new capital should be deployed, not hoarded, though the government hasn't defined the type of lending to avoid forcing bad lending decisions. Paulson also said he expects lenders to step up efforts to aid homeowners in avoiding foreclosures. So far interest has been pretty broad in the program and he emphasized that these are investments, not expenditures, which should ultimately not come at a cost to taxpayers.
Although there's nothing binding in place that would require banks to use the cash infusions to make new loans, Diane Dercher, chief economist at Waddell & Reed in Overland Park, Kans., says she thinks there will be a big push to encourage banks to lend, but that it will take time. "When they do lend, they're going to [use much more scrutiny] in thinking about who they will lend to and it will be very slow in getting down to just anybody," she says.
In economic news Monday, U.S. leading indicators rebounded by a better than expected 0.3% in September, from a revised 0.9% decline in August (-0.5% previously). That left the 6-month annualized rate of change at -2.5% from -2.1% previously. Positive contributions from money supply, consumer expectations, and the yield curve more than offset negative contributions from building permits, initial jobless claims, stocks, and the factory workweek, notes Action Economics.