U.S. Stocks Close Sharply Higher as Credit Jitters Appear to Ease

A late rally pushed U.S. stocks sharply higher at the close as takeover news and rate-cut speculation overshadowed jitters about tighter credit markets.

"We think that liquidity is returning to the market after being problematic," said Kevin Cronin, head of investments at Putnam. "We think the Fed's actions last week righted the ship, and we think things are going to get better going forward."

The rally ran across the board with all of the S&P 500 sectors trading higher. The major averages gained ground in the final hour of trading after the financials sector turned positive. 

Stocks traded off session highs shortly after noon when banks lost ground before reversing course to trade higher. Citi said its banking unit, Citibank, borrowed $500 million from the Fed discount window to fund clients. Citi said it has substantial liquidity and widespread borrowing capacity.

The other three largest U.S. banks also took the unusual step of borrowing directly from the Fed. Bank of America, JPMorgan Chase and Wachovia each borrowed $500 million at the discount window as well.

"We do have access to the discount window and that does help, but we are priced for the Fed to ease and ease aggressively," said Peter Yastrow, market strategist at MF Global. "Any indication that the Fed is not going to be easing aggressively in the months coming up is going to really throw some ice water on this rally."

Lehman Brothers also announced that it's closing its BNC Mortgage Unit and that the move will affect 1,200 employees.

"The big difference now is that the flight to quality, the race to the exits has become orderly," said Hugh Johnson, chief investment officer at Johnson Illington Advisors. "As a result, you can start to think about making sensible investments again.  I think that's because the Fed is involved."

Materials was the best performing sector followed by industrials. Alcoa was the biggest percentage gainer on the Dow, rising more than 4 percent.

"When you have a very oversold market, initially short covering drives it higher, then the real longer-term buyers come in and that's the stage we're in now," Sebastian Leburn, chief investment officer at Weiss Capital Management, told CNBC.com. "Valuations for larger cap companies are still very attractive and you're seeing money going into those stocks."

Investors were encouraged after merger-and-acquisition speculation dominated much of the news. Wall Street has feared that deterioration in the credit markets would negatively impact M&A activity, which has helped drive stocks higher.

Online brokerage firms TD Ameritrade and E-Trade have reportedly been in discussions about a possible deal for weeks, according to The Wall Street Journal.  However, neither side is yet close to a deal.

Mining company Rio Tinto confirmed on Wednesday it has raised the amount it needs to fund the $38.1 billion takeover of Canadian aluminium producer Alcan , despite the recent turbulence in the credit markets.

Nymex Holdings   Chairman Richard Schaeffer said Tuesday the commodities exchange has held preliminary discussions about a potential merger, but there is no guarantee of a deal.

Dubai World, the investment holding firm of the Dubai government, will acquire a 9.5% stake in MGM Mirage and 50% of the casino operator's CityCenter development project for $5 billion in a deal reported in The Wall Street Journal. Shares of MGM Mirage rose sharply.

"I think the worst is over," said Brett D'arcy, director of investments at CBIZ Financial Solutions. "I think today is a bit of a relief rally that the sky is not falling."

"I'm in the camp that the peak of this storm has passed and, much like Hurricane Dean, the lasting damage is going to be much less than feared," said Jeffrey Kleintop, chief market strategist at LPL Financial Services.

Wall Street continued to watch any action by the Fed very closely.  The Federal Reserve added $2 billion in temporary reserves to the banking system. 

Christopher Dodd, chairman of the Senate Banking Committee, told reporters Tuesday that Fed Chairman Ben Bernanke would use "all the tools" available to avert further economic damage.

"Maybe they took that emergency rate cut out of the marketplace, but I still believe that they will be contemplating future rate cuts down the road," said Anne Gulotta, vice president at Northern Trust Securities.

Treasury notes on the short end weakened on the Citigroup news that it had visited the Fed discount window.

New York light sweet crude futures fell to trade below $70 a barrel after the Energy Information Administration said oil inventories rose last week by 1.9 million barrels.  A Platts survey had forecast a draw down in crude of 3.2 million barrels.  Traders also got a surprise in gasoline inventories, which declined last week by 5.7 million barrels, much more than expected.

The ongoing weakness in the housing market saw Toll Brothers post a sharp decline in quarterly profit. The home builder declined to give guidance for the current quarter, due to uncertain market conditions.

Staying in the housing sector, applications for U.S. residential mortgages fell last week for the first time in three weeks, as a sharp drop in real-estate demand weighed, according to the Mortgage Bankers Association.

Shares of home improvement retailer Lowe's rose after the stock was upgraded by JPMorgan and UBS.

European Stocks Close Sharply Higher

European stocks finished sharply higher Wednesday as investors took heart from a potential cut in U.S. interest rates.

The London FTSE-100, Paris CAC-40 and Frankfurt DAX all closed firmly higher.

Shares of BHP Billiton helped to push the FTSE higher as the world's biggest mining company reported a rise in full-year profits of 35%, due to strong demand for industrial minerals.

Merger and acquisition activity resurfaced despite the credit concerns as Turkish conglomerate Sabanci Holding announced it and French supermarket operator Carrefour were "seriously" interested in buying Swiss supermarket-rival Migros. Carrefour shares were higher.

And Italian airline Alitalia, which has struggled to find a buyer, says fresh interest from investors has resurfaced for the Italian government's 50% stake. Shares of Alitalia gained.

Meanwhile, Deutsche Telekom's mobile phone unit T-Mobile secured rights to sell Apple's iPhone handset in Germany in a revenue-sharing deal, according to the Financial Times Deutschland. Shares of Deutsche Telekom gained.

Asian Markets Higher

Asian markets closed higher, lifted by hopes of a U.S. interest rate cut to calm turbulent markets, but the stronger yen weighed on Japanese exporters, such as Toyota Motor, offsetting gains. Tokyo closed almost flat.

The mood remains wary as market participants tried to gauge how the U.S. mortgage crisis that has roiled global markets will play out. Investors are also awaiting a decision on interest rates from the Bank of Japan. The BOJ starts a two-day policy meeting today. It is widely expected to keep interest rates unchanged.

Tokyo's Nikkei 225 Average closed unchanged while the broader TOPIX index slipped as investors sold financial stocks such as Resona Holdings again following their recent gains while lingering investor concern about credit markets dampened market sentiment. Trading firms and steelmakers such as Nippon Steel lost ground after rallying earlier this week.

South Korea's KOSPI posted a third straight session of gains, as fuel-dependent firms such as Korean Air rose following a drop in oil prices, while semiconductor firms advanced on hopes for increased chip supplies to Apple. Gains were underpinned as fears about the impact of tighter
credit markets on the global economy were being offset by a hope that the Federal Reserve will cut U.S. interest rates to contain a crisis that started in the U.S. subprime mortgage sector.

Australian shares reversed early losses to finish slight higher, as drug firm CSL jumped on robust earnings and an upbeat outlook, while miner BHP Billiton rose ahead of its earnings
report. But persistent worries about global credit markets weighed down on banking shares, keeping a lid on gains.

Hong Kong-listed shares in mainland companies jumped amid rising expectations that mainland investors would pile into China Life and other companies trading at steep discounts to their counterparts listed in Shanghai or Shenzhen. Hong Kong blue chips rose over 1% on renewed hopes that the U.S. central bank may soon cut interest rates to quell persisting worries about credit conditions, sending rate-sensitive property shares higher.

Singapore's Straits Times Index was sharply higher, led by a rebound in financial stocks such as DBS Group, United Overseas Bank and OCBC.

China's Shanghai Composite Index rose to a fresh record high despite the central bank's announcement late on Tuesday that it was raising interest rates again to fight inflation. Shares were higher across the board as even many banks and property companies, which may suffer minor damage to profits because of the rate hike, gained.

© 2009 CNBC.com