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Wall Street welcomes Fed's support

Latest update : 2008-07-09

Stocks rallied in Wall Street on Tuesday as oil prices dropped and Federal Reserve Chairman Ben Bernanke said the US central bank would extend its bailout facilities for struggling investment banks beyond the end of the year.

NEW YORK - Wall Street stocks and the dollar moved sharply higher on Tuesday after putting aside recent credit and inflation worries worries on reassuring comments from Federal Reserve Chairman Ben Bernanke and a sharp drop in commodities prices on futures markets.

Investors took comfort as crude tumbled, bringing the decline in oil prices so far this week to about $10. The rout in energy carried into metals and agricultural prices, with selling spurred along by a surging dollar. A rise in the U.S. currency means less dollars are required to purchase the commodities.

The dollar's rebound came broadly, as the U.S. unit was lifted by Bernanke's statement that the U.S. central bank is willing to keep its emergency lending facility for major Wall Street firms open beyond the end of the year.

Bernanke's comments also cushioned a decline in European stocks which were rocked after a Lehman Brothers report on two key mortgage finance companies  on Monday roiled markets. Lehman said a pending accounting change could force Fannie Mae  and Freddie Mac to raise a combined $75 billion in capital.

Long-dated U.S. government debt rose as the two-day slide in oil prices eased inflation fears.

The government regulator for Fannie and Freddie also sought to appease investor fears of the mortgage lenders' capital needs, saying that a proposed accounting change should not spur capital changes at the two government-sponsored agencies.

The market's reaction was overdone, some said, since Lehman itself said it doubted an accounting change detrimental to the two largest U.S. mortgage lenders would be enacted.

The U.S. equity markets started on a weaker note after a sharper-than-expected decline in pending U.S. home sales in May signaled more trouble for the beleaguered housing market.

But Bernanke's speech bolstered investor sentiment, and helped U.S. stocks bounce back from a session on Monday that had pushed the broad S&P 500 Index into a bear market -- defined as a 20 percent decline from a recent peak.

"The market is very oversold and was due for a bounce. I'm looking for financials to stabilize," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams.

The S&P financial index jumped 5.7 percent.

Also lifting U.S. shares was a rally in defensive stocks such as pharmaceutical shares, with the American Stock Exchange index of 14 big Pharma companies up 3.3 percent.

Fresh concern about the banking sector's outlook drove shares down in Europe.

The FTSEurofirst 300 index of top European shares ended the day down 1.47 percent at 1,161.38 points, but well off session lows.

Oil's decline pulled prices sharply off last week's record $145.85, a peak scaled amid rising tensions between Iran and the West over Tehran's nuclear ambitions and worries a brewing storm could hit the Gulf of Mexico's offshore oil fields.

U.S. light crude settled at $136.04 a barrel, down $5.33, after dropping as low as $135.14 a barrel, the lowest since June 26. London Brent crude settled at $136.43 a barrel, down $5.44.

Spot gold prices fell $5.05 to  $920.40.

Bernanke's comments bolstered the dollar.

"The FX market in general is heartened by Bernanke's extension of liquidity," said Win Thin, senior currency strategist, at bank Brown Brothers Harriman in New York.

"It shows that the Fed continues to remain flexible" in its efforts to unfreeze credit and instill calm in financial markets," he added.

 The dollar rose against major currencies, with the U.S. Dollar Index up 0.42 percent at 73.01. Against the yen, the dollar gained 0.31 percent at 107.47.

The euro fell 0.43 percent at $1.57.

The benchmark 10-year U.S. Treasury note rose 4/32 to yield at 3.89 percent. The 30-year U.S. Treasury bond added 15/32 to yield 4.46 percent.

 Asian stocks fell sharply overnight on jitters caused by the big declines in Fannie Mae and Freddie Mac.

Japan's Nikkei share average fell 2.45 percent to a three-month closing low.

Shares of companies in the Asia-Pacific region were down 2.4 percent, according to an MSCI index. The all-countries world index slipped to the lowest since January 22.

Date created : 2008-07-09