U.S. stocks ended mixed but were well off the day's lows amid sustained credit market worries.
"We're probably through the brunt of the volatility stage," said Keith Wirtz, chief investment officer at Fifth Third Asset Management.
"The market is going through summer turbulence," he added. "It's been volatile and there hasn't been much liquidity in terms of participants in the marketplace. But once we get to September we think the Fed is going to go through an adjustment of interest rates and that's going to give the relief to the market."
The Dow Jones Industrial Average closed with a modest gain of 42 points but rebounded from an intraday dip that took the blue chip index below the psychological 13,000 level. The S&P 500 ended with a tiny loss of less than 1 point while the Nasdaq Composite rose slightly.
"We are now digesting the Fed's actions and clearly a reality check is coming back into the homebuilders and brokers," said David Kotok, chief investment officer at Cumberland Advisors. "This long housing/mortgage finance repricing of risk is not over. It will take another year or two to run its full course."
Stocks finished off earlier lows as investors went shopping for materials and industrials shares, which closed with respective gains 1.3% and 0.8%.
The financial sector was the worst-performing group on Monday and weighed on the major indexes. Major brokerage stocks such as Bear Stearns, Lehman Brothers and Merrill Lynch each fell more than 1% amid continued concerns regarding credit availability.
"We're going to take a little while to get out of this," said James Paulsen, chief investment strategist at Wells Capital Management. "I think we're searching for an interim bottom right now, and if we can settle down a little bit, I think the ultimate goal is to get the market focusing once again on fundamental reports, as opposed to just fear-based rumors during the day."
The Federal Reserve injected another $3.5 billion into the banking system after cutting the discount lending rate on Friday.
Treasury prices rose, sending yields lower, as investors took money out of stocks and even money markets and put it into bonds in a flight-to-safety bid.
Meanwhile, employees at Countrywide Financial bore the brunt of turbulent credit markets as America's largest mortgage lender began laying off staff, the Wall Street Journal reported Monday, citing an internal e-mail.
Atlanta-based SunTrust Banks said it expects to eliminate about 2,400 jobs by the end of 2008 as part of a plan designed to save $530 million annually by 2009.
Consolidation in the stock exchange operators also took center stage as the Nasdaq announced possible plans to sell its 31% stake in the London Stock Exchange.
Nasdaq is currently locked in a takeover battle with Borse Dubai to win control of Nordic exchange OMX, whose Chairman Urban Backstrom said Borse Dubai's bid wasn't more attractive than Nasdaq's offer, newspapers reported Monday.
The flow of corporate earnings has slowed, but Lowe's posted a gain in second-quarter profit, as new stores boosted total sales at the second biggest home improvement retailer.
On the economic front, a closely watched leading indicator for the U.S. economy rose 0.4% in July, according to the Conference Board. The increase matched expectations. The Conference Board said the index continued to suggest that the economy is likely to grow in the near term, but at a slow pace.
In the energy markets, New York light sweet crude futures slipped to just above $71 a barrel as forecasts showed Hurricane Dean was unlikely to hit the oil production and refining centers in the Gulf of Mexico.
Nymex crude oil for September delivery fell 86 cents per barrel, or 1.2%, to settle at $71.12.
Down for two of the last six sessions.
Off 9.1% from its record high of $78.21 on July 31.
Month-to-date, Nymex crude oil is down 9.1%.
European Stocks Finish Moderately Higher
European stocks managed to close moderately higher, continuing an overseas equity rally on the back of the Federal Reserve's surprise cut in overnight lending rates Friday.
Underlying concern about the effect of subprime-related losses and difficulties in valuing bundled mortgage products remained, despite reassurance from French Economy Minister Christine Lagarde.
"I think the worst of the crisis is behind us. I don't exclude that, particularly in America, a number of funds could find themselves in difficulty," Lagarde told BFM radio Monday.
The London FTSE-100, Paris CAC-40 and Frankfurt DAX all closed modestly higher.
Banking stocks were in focus with HSBCannouncing it was in talks to buy a majority stake in Korea Exchange Bank, valued at $4.5 billion. Shares of HSBC fell, despite a positive FTSE.
On the earnings front British recruitment firm Michael Page International reported a 53% rise in first-half profit and said it was positive on its further expansion opportunities.
The food-production sector was also in the spotlight as French food group Danone made its formal takeover offer for Dutch rival Numico, offering 55 Euros ($74.25) per share in cash.
Asian Stocks Rally
Asian stocks rallied Monday -- Japan, South Korea and Australia all booked huge percentage gains. The surge was in line with a rebound in global markets after the U.S. Federal Reserve slashed a key U.S. bank lending rate, soothing jitters about a global credit credit.
Still markets will likely remain volatile in the next few weeks as uncertainty over the credit environment continues and U.S. growth weakens.
Financial stocks, hardest hit in the selloff, were back in favor. Australia's top investment bank Macquarie Bank ended almost 10% higher, Singapore's DBS Group gained over 6%, Japan's top lender Mitsubishi UFJ added 2.3%, while South Korea's top lender Kookmin Bank gained 3%.
Tokyo's Nikkei 225 Average rallied to close 3% higher to book its biggest one-day percentage gain in 13 months, rebounding from a plunge last week as the Federal Reserve's move to cut its discount rate eased fears about credit concerns and prompted buying across the board.
South Korea's KOSPI posted its biggest daily gain in five and a half years, ending 5.69% higher, as credit fears eased somewhat. Financials such as Daewoo Securities surged, while exporters such as LG.Philips LCD also advanced on a day in which 780 shares gained and only 46 fell.
Australia's S&P/ASX 200 Index finished up 4.6% in its biggest one-day percentage rise in nearly a decade, led by a rally in financial firms. Recovering global equity markets also triggered a bounce in metal prices, lifting shares in mining firms such as BHP Billiton. QBE Insurance closed almost 11% higher after it posted a large jump in first-half earnings, beating forecasts.
Singapore's Straits Times Index closed 6% higher, in line with rallies in Asian markets. Banks were leading the advance with DBS Group, United Overseas Bank, and
Oversea-Chinese Banking Corp making gains.
China's Shanghai Composite Index surged 5.3%. Large-caps led the charge, with Industrial & Commercial Bank of China leading the advancers.
Hong Kong blue chips rose 3.6% and China plays jumped 5.3%, tracking a rebound in global equities on the Fed's discount rate cut. But, though the hefty blue-chip gains were on par with levels last seen in April 2003, investors remained wary of the credit crisis.