Oil jumps on bailout fears, US stocks fall sharply

Doubts over the US government bailout of troubled banks pulled the dollar down and sent oil prices soaring by more than 20% in their biggest one-day gain on record. Meanwhile, the Dow Jones slipped by 3.28%, while the Nasdaq index shed 4.17%.



Widespread doubts about the U.S. government's $700 billion bailout of troubled banks slammed stocks, bonds and the dollar on Monday, while oil soared more than 20 percent in its biggest one-day gain on record.


The dollar extended losses on worries about the bailout resulting in a massive U.S. budget deficit, dropping to a three-week low against the euro. The single European currency had its biggest one-day rise since January 2001.


Euro zone government bonds hit a six-week low, extending losses from late last week, and U.S. Treasuries also fell as investors fretted the plan would require more U.S. government debt issuance, boosting the yield on longer-dated debt.


Investors switched out of dollars into trusted safe havens, sending gold up nearly 4 percent, on fears that the massive bailout may not stem the long-simmering credit crisis.


But the day's biggest eye-grabber was an off-the-charts move by the record surge in crude as the U.S. oil contract for October expired, squeezing traders who had bet prices would follow a recent trend and fall.


With crude prices on the November contract rising on a view the bailout would bolster the flagging U.S. economy and drive up demand, traders were forced to buy oil.


"Short squeeze, crude expiration -- that's it in a nutshell," said Tom Knight, a trader at Truman Arnold in Texarkana, Texas.


At one point crude jumped more than 24 percent to hit $130 a barrel, before paring gains to settle up $16.37 at $120.92 a barrel. The November contract, which was much more actively trade, gained $6.62 to $109.37.


The weak dollar, which boosts the purchasing power of commodity buyers using other currencies, helped fuel the gains in the price of crude.


Uncertainty about the bailout plan pushed the three major U.S. stock indexes down more than 3 percent, while leading European shares fell more than 2 percent. Analysts said they could not gauge the ultimate cost or form of the plan.

"It's just too big to analyze on a one-day view," said John Haynes, a strategist at Rensburg Sheppards. "The Fed, I think, is going to win in the end, but as to whether stocks go up or down in the next three months, it's the toss of a coin."


The bailout that the Bush administration is pressing Congress to approve would be one of the costliest for financial companies since the Great Depression.


The Dow Jones industrial average closed down 373.23 points, or 3.28 percent, at 11,015.21. The Standard & Poor's 500 Index shed 47.96 points, or 3.82 percent, at 1,207.12. The Nasdaq Composite Index lost 94.92 points, or 4.17 percent, at 2,178.98.


Only 2 of the Nasdaq 100 stocks ended higher.


In the latest move over the past week that will transform how Wall Street operates, the Federal Reserve late Sunday agreed to allow the last two big U.S. investment banks, Goldman Sachs and Morgan Stanley, to become bank holding companies.


Monday's stock slump reversed a rally on Friday when the bailout announcement had sparked Wall Street's best one-day gain since 1987.


"Here it is Monday and people are waking up from a gigantic hangover, trying to figure out what's next," said John Schloegel, vice president of investment strategies for Capital Cities Asset Management in Austin, Texas.


"There's pain ahead for the economy, pain for the consumer, pain at the gas pump," he said. "We're getting hit with a double whammy today with commodities moving higher."


Banks were the biggest stock losers. The biggest drag on the S&P 500 was JPMorgan Chase, down more than 13 percent, followed by Well Fargo & Co and Bank of America. They fell 11.6 percent and 8.88 percent, respectively.


In Europe, the region's biggest bank, HSBC, fell 5.8 percent and was the largest drag on the pan-European FTSEurofirst 300 index of top European shares.


The pan-European index ended 2.1 percent lower at 1,127.08, after a record surge of more than 8 percent on Friday.


As the dollar suffered, the euro rose as high as $1.4775, its highest since late August, Reuters data showed.


"Nobody knows what form the bailout package will take," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida.


"We only know vaguely how much it will cost. So if you are a foreigner and looking at the U.S. fiscal position it does not look pretty for this year and next."


The euro rose 2.52 percent at $1.4828.


The dollar fell against major currencies, with the U.S. Dollar Index down 1.99 percent at 76.031. Against the yen, the dollar fell 2.10 percent at 105.16.


The benchmark 10-year U.S. Treasury note fell 1/32 to yield 3.82 percent. The 30-year U.S. Treasury bond fell 6/32 to yield 4.40 percent.


Gold rose, also benefiting from its reputation as an inflation hedge as crude prices rose.


Spot gold prices rose $29.05 to $900.20 an ounce.


"A flight to quality, without a doubt. People are looking for somewhere to put their money," said Jonathan Jossen, a COMEX gold options floor trader. "It would not shock me to see gold at $950 by the end of the week."


Asian stocks climbed overnight. Japan's Nikkei share average closed up 1.4 percent, after hitting a three-year low last week.


Outside of Japan, stocks in the Asia-Pacific region were up 2.4 percent, bouncing further from a two-year low plumbed on Thursday, according to an MSCI index.


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