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US stocks rebounded on Tuesday, clawing back a day after their biggest drop in seven years on growing optimism that US authorities may finance a rescue of insurer American International Group. Hopes for a rescue grew after a source briefed on the matter told Reuters several hours after the market close that the Federal Reserve was negotiating roughly $85 billion in financing to keep AIG from collapsing. Index futures pointed to a higher market open on Wednesday after the news.
Any rescue of AIG would serve to calm global financial markets roiled by a streak of Wall Street disasters, including the bankruptcy of Lehman Brothers. "The Federal Reserve obviously thought the systemic risk from a major insurance company was too great to let go. Remember, AIG not only does major business with Wall Street and the financial markets but also Main Street," said Chris Orndorff, who helps oversee $50 billion in assets as managing principal at Payden & Rygel Investment Management in Los Angeles.
During the regular session, a Bloomberg report that the Federal Reserve was considering a loan to AIG pulled the market out of an afternoon funk. The Dow Jones industrial average rose 141.51 points, or 1.30 percent, to close at 11,059.02, while the Standard & Poor's 500 Index gained 20.90 points, or 1.75 percent, to 1,213.60. The Nasdaq Composite Index was up 27.99 points, or 1.28 percent, at 2,207.90.
Financial shares, rebounding from their worst day ever on Monday, led the market higher after the report of possible Fed involvement in resolving the crisis surrounding AIG. The insurer's credit ratings had been downgraded late Monday, adding to concern about its ability to raise capital to help weather fast-mounting credit losses. After Tuesday's closing bell, Morgan Stanley shares rose more than 7 percent after reporting stronger-than-expected quarterly results.
AIG shares, under heavy pressure for days, hit a low of $1.25 early in the session, but then pared the worst of its losses. It ended down 21.2 percent at $3.75, before trading at $2.50 in after-hours trade. At one time, AIG was the world's largest insurer based on market value. Among other financial companies, Wells Fargo shares jumped 12.7 percent to $34.93, while Bank of America rose 11.3 percent to $29.55.
But shares of Goldman Sachs Group Inc fell 1.8 percent to $133.01 after the investment bank said quarterly profit plunged 70 percent as the worst market slump in decades led to weaker-than-expected revenues. Hewlett-Packard Co rose 6.8 percent to $48.41 and ranked among the stocks giving the biggest boost to the Dow. Also helping the market, oil prices tumbled to end down nearly 5 percent, dropping for the second day in a row. US crude futures lost $4.56 to settle at $91.15 a barrel. Lower oil prices helped fuel-cost sensitive airlines and retailers. An airline stock index ended up 11.5 percent. The S&P retail index advanced 0.8 percent.
Trading was active on the New York Stock Exchange, with about 2.2 billion shares changing hands, above last year's estimated daily average of roughly 1.9 billion, while on Nasdaq, about 3.2 billion shares traded, also far above last year's daily average of 2.17 billion. Declining stocks outnumbered advancing ones on the NYSE by 17 to 15, while advancers beat decliners on the Nasdaq by about 4 to 3.

Copyright Reuters, 2008

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