Wall Street rallies on bail-out hopes

Mounting expectations that Congress would speedily pass the proposed $700bn financial sector bail-out bolstered US stocks on Thursday, outweighing a slew of downbeat news elsewhere.

Markets brushed aside a profit warning from General Electric and a series of grim economic updates as Washington grew closer to finalising a deal.

Financials, up 2.6 per cent, were among the biggest gainers on hopes that the plan would afford paralysed money markets much-needed relief.

GE gained 4.4 per cent at $25.68 even after the world’s fourth-largest company cut its third-quarter and full-year earnings forecast and suspended a share buy-back.

Market-wide gains also took in housebuilders in spite of data that showed detached family homes in August fell to their lowest level since January 1991. DR Horton and KB Home rallied 5.6 per cent to $13.92 and 4.1 per cent to $21.16, respectively.

Other figures showed that the number of workers claiming unemployment benefits jumped last week, and a sharp fall in demand for durable goods. “Industry is in trouble,” wrote Ian Shepherdson, economist at High Frequency Economics, in a note to clients.

Yet stocks extended early gains after Chris Dodd, chairman of the US Senate Banking Committee, said negotiators had reached “fundamental agreement” on the principles of the Wall Street bail-out.

The S&P 500 closed up 2 per cent at 1,209.18 and the Dow Jones Industrial Average rose 1.8 per cent at 11,022.06. The Nasdaq Composite Index rose 1.4 per cent at 2,186.57.

Christopher Colarik, portfolio manager at Glenmede Investment, said: “At the end of the day it was going to have to get done [but] was it going to be decorated like a fancy Christmas tree? That’s really where there was a lot of uncertainty, and how fast [it was passed] was also up in the air.”

Still, reports that the government would receive an equity stake in companies involved in the bail-out put a lid on more spectacular gains.

The Chicago Board Options Exchange Volatility Index, known as Wall Street’s fear gauge, fell 6.8 per cent, although at 32.80 it remained above the psychologically significant level of 30, a sign of distress.

A report from Bespoke Investment Group said: “A prolonged Vix above 30 hasn’t happened too often since 1990, and it’s the first time it has happened since January 2003.”

Escaping the upward momentum, Washington Mutual sank 25.2 per cent to $1.69 on reports that regulators are trying to quickly broker a deal for the embattled savings and loan institution.

Capital One Financial fell another 5.1 per cent at $49.72. The credit card and banking group priced a public share offering at $49 a share.

Discover Financial, another credit-card company, which spun off from Morgan Stanley, fell 2.6 per cent at $14.82. More customers were late with payments and its third-quarter net income fell 11 per cent.

Meanwhile, in technology, Microsoft gained 3.5 per cent at $26.61 after an appeals court ruled in favour of the software group in its music patent battle against Alcatel-Lucent.

The hardware and semiconductor sectors moved higher. The gains came in spite of Wachovia’s issuing a bearish outlook and downgrading its recommendation from “overweight” to “market weight”. The bank forecasts slower growth in personal computer sales.

Dell, Intel and Hewlett-Packard gained 1.4 per cent at $16.93, lost 0.7 per cent to $18.57 and gained 2 per cent to $47.70, respectively.

Oracle rose 2.6 per cent to $20.47 on reports the computer software group will enter the hardware market.

In the consumer discretionary sector, Bed Bath & Beyond gained 4.8 per cent to $32.19 after net income matched analyst estimates. JC Penney inched up 0.1 per cent at $35.90 as Merrill Lynch downgraded its recommendation on the retailer.

However, lodging stocks suffered after JPMorgan reduced its estimates on eight because of lower demand.

Starwood Hotels & Resorts , Choice Hotels International and Orient-Express Hotels fell 2.3 per cent at $30.70, 3.3 per cent at $27.99 and 5 per cent at $29.75, respectively.