(Adds close of U.S. markets)
By Herbert Lash
NEW YORK, March 18 (Reuters) - U.S. stocks surged on
Tuesday as investors overcame initial disappointment that the
Federal Reserve cut its benchmark interest rate less than
expected and focused on the likelihood of future cuts, driving
the S&P 500 to its biggest percentage gain in more than five
years.
Oil prices surged 3 percent, while the dollar reversed
earlier losses and strengthened against the euro. And U.S. gold
futures turned lower after the Fed slashed its target interest
rate by three-quarters of a percentage point to to 2.25
percent.
The S&P 500 had its best daily percentage gain since
October 2002, rising more than 4 percent. The technology-rich
Nasdaq also jumped more than 4 percent for its biggest
percentage gain since October 2003, while the Dow industrials
jumped more than 400 points.
Earlier, European benchmark indexes gained more than 3
percent.
Investors had expected a cut of a full percentage point but
analysts said the Fed's recent actions showed it was prepared
to do what it takes -- such as its intermediation in the sale
of investment firm Bear Stearns on Sunday -- to get its hands
around a simmering global credit crisis.
Better-than-expected earnings from Wall Street banks
Goldman Sachs <GS.N> and Lehman Brothers <LEH.N> also provided
relief to the battered financial sector on both sides of the
Atlantic.
"The Fed has shown that they are focused on getting the
economy back on its feet first and foremost, and they will
worry about inflation later," said K. Daniel Libby, senior
portfolio manager at Sands Brothers Select Access Fund in
Greenwich, Connecticut.
U.S. stocks jumped to session highs after the Fed announced
its decision, and U.S. short maturity Treasury debt prices
extended losses.
Market expectations of a Fed rate cut had deepened after
JPMorgan Chase<JPM.N> on Sunday agreed to purchase stricken
rival Bear Stearns <BSC.N> for the fire-sale price of $2 a
share.
"The economy will likely recover later this year based on
what the Fed is doing. The market is rallying today. It got so
oversold that I won't be surprised to see it rally further,"
said Chip Hanlon, president of Delta Global Advisors Inc in
Huntington Beach, California.
"There's been tremendous panic. People throwing the baby
out with the bath water, preparing for a Category 5 hurricane,
and that presents a buying opportunity," Hanlon said.
The Dow Jones industrial average <> was up 420.41
points, or 3.51 percent, at 12,392.66. The Standard & Poor's
500 Index <.SPX> was up 54.14 points, or 4.24 percent, at
1,330.74. The Nasdaq Composite Index <> was up 91.25
points, or 4.19 percent, at 2,268.26.
FINANCIAL SHARES DRIVE GAINS
U.S. and European stocks had rallied in anticipation of a
rate cut aimed at easing a global credit crunch, and after the
profit reports from Goldman Sachs and Lehman Brothers topped
Wall Street estimates.
Investors were reassured that U.S. financial companies are
holding up despite market turmoil caused by the subprime
mortgage crisis and a slowing U.S. economy.
Stocks may be trading off a floor and could be poised for a
significant rebound in coming months, which has made David Joy,
market strategist at RiverSource Investments, a unit of
Ameriprise Financial Inc in Minneapolis, a selective buyer.
"We don't think the economy is quite as bad as people
think. We're discounting worse expectations than we're likely
to get," said Joy. "That's not to say we don't recognize the
risks out there and the problems. But gosh, it looks to us like
value is beginning to emerge in a number of places."
It was the best day for financial stocks since March 2000,
while top U.S. home finance companies Fannie Mae and Freddie
Mae surged the most in 20 years. Fannie soared 27 percent to
$28.22, and Freddie climbed 26 percent to $26.02. Homebuilders
also rose sharply.
Expectations that regulators will ease restrictions on
Fannie Mae <FNM.N> and Freddie Mac <FRE.N> and encourage them
to boost spending in the slumping U.S. housing market also
eased investor jitters.
SAFE-HAVEN BID SAPPED
Rising stocks sapped the safe-haven bid for government
debt, and oil rose on expectations a Fed rate cut will further
weaken the U.S. dollar and spur investor demand for crude.
U.S. benchmark 10-year Treasury notes traded a full point
lower and euro-zone government bond prices tumbled as Wall
Street rallied and inflation worries in Europe took the edge
off speculation about a near-term rate cut by the European
Central Bank.
Investors in Europe were less sure about a rate cut by the
ECB after a media report that the bank was unlikely to cut
rates anytime soon.
The FTSEurofirst 300 index <> closed up 3.5 percent
at 1,241.99 points.
Banking stocks that have been hammered in recent days also
led the rebound in Europe, with UBS <UBSN.VX> up 14.4 percent,
Credit Agricole <CAGR.PA> up 9.3 percent and Deutsche Bank
<DBKGn.DE> up 6.3 percent.
The strong rebound was echoed elsewhere in Europe:
Germany's DAX index <> rose 3.35 percent, UK's FTSE 100
index <> was up 3.41 percent and France's CAC 40 <>
gained 3.54 percent.
Most Asian stock markets closed higher, with MSCI's measure
of Asian stocks outside Japan <.MIASJ0000PUS> rising more than
1 percent. Hong Kong's main index <> climbed 1.4 percent
and Japan's Nikkei 225 <> closed up 1.5 percent.
Oil prices rebounded sharply to over $109 a barrel after
Fed rate cut, reversing heavy losses Monday that had been
triggered by financial woes at investment banks, including Bear
Stearns. That reflected weakness in the overall economy of the
world's largest energy consumer.
U.S. crude <CLc1> rose $3.74, or 3.54 percent, to settle at
$109.42 a barrel after sliding more than 4 percent on Monday in
the biggest one-day percentage drop in more than seven months.
London Brent <LCOc1> gained $3.81 to $105.56.
U.S. gold futures finished slightly higher on the back of
inflation fears due to a bounce of crude oil prices.
The active gold contract for April delivery <GCJ8> in New
York settled up $1.70 at $1,004.30 an ounce, a session high.
(Editing by Leslie Adler)
