Stocks shot up after investors cheered remarks from President Obama that the budget sets aside more money for banks if necessary.
In economic news, new home sales slumped 10.2 percentto a record low pace of 309,000 in January as prices hit a five-year low. Economists had expected a much more modest drop to a 330,000 rate.
New jobless claims jumped by 36,000 to 667,000, the highest since 1982, last week. Continuing claims popped over the 5 million mark to a record 5.11 million.
And durable-goods orders dropped 5.2 percent to $163.8 billion in January, more than double of what was expected, and the prior month was revised sharply lower. Excluding volatile transportation components, orders fell just 2.5 percent.
Still to come is the FDIC fourth-quarter banking profile, which gives an overall report card for the sector, due out at 2:30 pm.
Bank of America jumped more than 10 percent and Citigroup advanced more than 5 percent after Obama said his proposed budget would set aside $250 billion as a "placeholder" if he decides to ask Congress for more money to juice the ailing financial system.
The government may be on the verge of boosting its stake in Citigroup to as much as 40 percent, the Wall Street Journal reported citing people familiar with the situation.
Stocks have whipsawed their way through a volatile week so far, with comments from Federal Reserve Chief Ben Bernanke and President Barack Obama lending support and caution in equal measure.
Obama said Thursday that "hard choices lie ahead" as he prepared to unveil his first federal budget. He said the budget would save billions of dollars by rolling back the Bush tax cuts on the wealthy.
And White House economic adviser Paul Volcker said banks that are big enough to destabilize markets should be subject to stricter oversight and that some international standards should be agreed upon, in prepared remarks he will deliver to the congressional Joint Economic Committee.
General Motors fell more than 10 percent after the troubled auto maker reported a loss of more than $30 billion for 2008. The company, which submitted its road map for recovery to the US Treasury last week, said it expected auditors to cast doubt on whether GM can survive.
American International Group jumped more than 10 percent as the insurance giant faces deep restructuring as it pushes on with discussions with US authorities. The group could be split into at least three government-controlled parts, the Financial Times reported citing people close to the situation.
American depositary shares of UBS picked up more than 10 percent after it replaced CEO Marcel Rohner with Oswald J. Gruebel, formerly head of crosstown rival Credit Suisse.
Investors kept one eye on the UK and its moves to stem the financial crisis. The country’s government launched a scheme designed to insure more than $712 billion of toxic assets. The scheme, which is an attempt to unclog the stalled lending market and boost the recession weary economy, boosted UK bank shares by between 10 percent and 30 percent.
Also in the UK, Royal Bank of Scotland, which is 70 percent owned by the British taxpayer, reported a record loss of $34.2 billion for 2008. RBS, along with other UK banks, is expected to use the new toxic-asset insurance scheme.
Still to Come:
THURSDAY: New home sales; earnings from Dell, Gap, and Kohl's
FRIDAY: GDP; consumer sentiment
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