Closing Market Recap: U.S. Stocks Rally Most Since 2002 on U.S. Gov't Plan Hopes

The S&P 500 rallied the most since 2002 on hopes the U.S. government will create a company to buy unwanted assets from the private sector in a move to free up balance sheets.

U.S. Treasury Secretary Henry Paulson has raised the issue of a new government-owned corporation with regulators, CNBC reported.

Reuters later reported something similar, but no details were released and spokespersons for the Treasury and Federal Reserve declined to comment.

Speculation suggests the government-owned company would be somewhat similar to the Resolution Trust Corporation, which the government created in the late 1980s to liquidate real-estate related assets.

Marc Zabicki, market strategist at H&R Block, said the sudden change in sentiment is indicative of the "absolutely unprecedented" volatility, fear and greed in markets.

"The reaction for the market to an idea just shows the volatility and the extreme fear we faced earlier today," Zabicki said.

Toronto's S&P/TSX composite index closed up 187 points to 12065, the S&P 500 closed up 50 points to 1207, the Dow Jones industrial average closed up 410 points to 11020 and the Nasdaq closed up 100 points to 2199.

The 4.3% gain in the S&P 500 was the largest since Oct. 15, 2002, but didn't erase the previous day's decline.

Aside from the late-day change in sentiment, it was another gut-wrenching day.

Sentiment had improved overnight after co-ordinated actions from major central banks. In an effort to bolster U.S. dollar liquidity, the European Central Bank, the Bank of England, the Federal Reserve, the Bank of Japan, the Swiss National Bank and the Bank of Canada opened up a combined $180 billion of swap lines to ease U.S. dollar funding pressures.

But later, worries about the future of Morgan Stanley and speculation of a run on the trust companies who hold hedge fund assets caused a flight-to-safety. Morgan Stanley and Goldman Sachs are the only remaining independent investment banks.

Equities also briefly spiked after UK officials banned short selling.

The swift changes in sentiment sent the Volatility Index, or VIX, to its highest level since 2002. The S&P 500 traded in a 6.8% intraday range, two-year yields bounced between 1.35% and 1.79% and gold traded in a nearly $100 range.

At 4:45 p.m. EDT, U.S. two-year yields were up 1.5 bps to 1.65%, with five-year yields up 8.6 bps to 2.60%, 10-year yields up 12.3 bps to 3.54% and 30-year yields up 11.2 bps to 4.19%. The Eurodollar March 09 contract was down 7.0 ticks to 97.17. The yield curve was steeper, with the 10/2-year spread up 9.7 bps to 187.50 bps.

Yields on two-year Canadian government bonds were up 4.2 bps to 2.60%, with five-year yields up 5.1 bps to 2.95%, 10-year yields up 8.2 bps to 3.52% and 30-year yields up 8.3 bps to 4.03%. The December 08 BAX contract was down 2.0 ticks to 96.93.

In Germany, returns on two-year German bonds were up 3.9 bps to 3.67%, with five-year yields up 4.5 bps to 3.81%, 10-year yields up 2.0 bps to 4.04% and 30-year yields up 7.4 bps to 4.69%.

Yields on UK two-year bonds were down 8.3 bps to 4.15%, with five-year yields flat at 4.31%, 10-year yields up 0.9 bps to 4.42% and 30-year yields up 2.5 bps to 4.38%.

The Canadian dollar was up 0.0101 to 0.9411 against the U.S. dollar (1.0626 USD/CAD) and up 1.66 to 99.22 against the yen.

The U.S. dollar was up 0.77 to 105.42 against the yen and the Dollar Index was down 0.053 to 78.042.

The euro was up 0.0024 to 1.4350 against the U.S. dollar, down 0.0121 to 1.5250 against the Canadian dollar, up 0.0008 to 0.7890 against the pound sterling and was higher by 1.36 to 151.27 against the yen.

The pound sterling was up 0.0012 to 1.8186 against the U.S. dollar and down 0.0168 to 1.9325 against the Canadian dollar.

WTI crude oil was up $1.16 to $98.32. The front month gold contract at the Chicago Board of Trade was up $8.10 to $858.70 per ounce.

All data taken at 4:45 p.m. EDT.

By Adam Button, abutton@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , edited by Sarah Sussman, ssussman@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it

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