Stocks pop on mergers, Fed bets

NEW YORK (CNNMoney.com) -- Stocks rallied Wednesday, building on the recent recovery, as takeover talk and bets that the Federal Reserve will cut interest rates next month cooled worries about the impact of the tightening credit market on equities and the economy.

The Dow Jones industrial average (up 145.27 to 13,236.13, Charts) rose about 145 points, or 1.1 percent. The broader S&P 500 (up 16.95 to 1,464.07, Charts) index gained 1.2 percent and the tech-fueled Nasdaq Composite (up 31.50 to 2,552.80, Charts) gained 1.3 percent.

Quick Vote

Is the worst of the stock market selloff over?

• Absolutely
• Probably
• No way
• Too early to say

or View results

Bond prices slumped, boosting the corresponding yields, with the recent 'flight to safety' by investors seeming to be on the wane, further suggesting that worries about the credit market are dampening.

"The markets are acting nicely today on the excuse that we had M&A back in the marketplace after several weeks," said Peter Cardillo, chief market economist at Avalon Partners.

After a tough period, stocks are moving into a period of greater calm, Cardillo said. "Over the next few weeks, I think we'll see narrow gyrations, less volatility and a stabilization period," he said.

After the close, Abercrombie & Fitch (Charts) warned that 2008 earnings will miss current forecasts, Briefing.com reported. The retailer also reported higher quarterly earnings and revenue. However, investors focused on the outlook and shares fell in extended-hours trading.

Also after the close, Hot Topic (Charts) reported a bigger-than-expected second-quarter loss and warned that third-quarter earnings will miss expectations, according to Briefing.com. Shares dipped in extended-hours trading.

Gap (Charts, Fortune 500) and Aeropostale (Charts) are among the companies reporting quarterly earnings Thursday morning.

Investors on Thursday will also pay some attention to the weekly jobless claims report, released before the start of trade.

The Nasdaq and S&P 500 gained Tuesday, as investors welcomed a meeting among Federal Reserve Chairman Bernanke, Senator Dodd and Treasury Secretary Paulson on the problems in the financial markets.

The meeting seemed to remind investors that the central bank and Washington are aware of the pummeling the financial markets have taken over the last few weeks on concerns about the credit and mortgage markets.

The meeting also raised hopes that the Federal Reserve will cut the fed funds rate at its Sept. 18 policy meeting. Although economists believe that the central bank is unlikely to make a cut ahead of the next policy meeting, according to a recent survey.

Last week, the central bank cut the largely symbolic discount rate - the rate at which banks borrow directly from the central bank.

Citigroup (up $0.37 to $48.43, Charts, Fortune 500), Bank of America (up $0.35 to $51.65, Charts, Fortune 500), JPMorgan Chase (down $0.20 to $46.00, Charts, Fortune 500) and Wachovia (up $0.46 to $49.70, Charts, Fortune 500) all said Wednesday that they had borrowed $500 million each from the Federal Reserve, using the bank's discount window. The move was seen as providing reassurance to the broad market.

The U.S. Federal Reserve has been injecting billions into the banking system over the last few weeks, so as to keep liquidity flowing. Separately, on Wednesday, the European Central Bank said it plans to add 40 billion euros to the banking system.

All of these factors continued to support stocks Wednesday, along with the day's merger news and speculation.

"The underlying concerns in the market are still there," said Brett Hammond, chief investment strategist at TIAA-CREF. "But I think people are starting to believe that the Fed is paying attention. We aren't necessarily seeing the same downturns in stocks we've been seeing [this summer]."

Wednesday brought a spate of merger talk, including news that Dubai World, the investing arm of the Dubai government, will buy a 9.5 percent stake in MGM Mirage (up $6.62 to $80.94, Charts, Fortune 500), in a deal worth more than $5 billion.

NYMEX Holdings (up $7.28 to $126.06, Charts) confirmed late Tuesday that it has discussed selling itself with potential suitors, Reuters reported. NYMEX is the parent company of the New York Mercantile Exchange.

And reports surfaced that brokerages TD Ameritrade (up $0.80 to $17.15, Charts) and E*Trade (down $0.32 to $15.25, Charts) are in merger talks.

Elsewhere in the financial sector, a number of firms announced layoffs amid the fallout in the mortgage market.

Lehman Brothers (up $1.00 to $58.54, Charts, Fortune 500) said Wednesday afternoon that it is shuttering its subprime mortgage lending unit, which will result in 1,200 layoffs and a $25 million charge.

HSBC (up $1.65 to $90.75, Charts), Europe's largest bank, said it is closing its Indiana mortgage unit, which will result in it cutting 600 jobs.

Also, Accredited Home Lenders (down $0.45 to $6.10, Charts) said it won't take any more loan applications and that it will cut 1,600 jobs, due to the problems in the subprime mortgage lending market.

In other news, Toll Brothers (up $1.06 to $22.15, Charts, Fortune 500) reported slumping earnings and warned about its outlook. However, the luxury homebuilder's earnings were nonetheless stronger than expected,.

Overall gains covered a number of sectors, with 28 out of 30 Dow issues gaining, led by Alcoa (up $1.62 to $36.22, Charts, Fortune 500), Caterpillar (up $1.02 to $75.30, Charts, Fortune 500), DuPont (up $1.17 to $48.92, Charts, Fortune 500), General Electric (up $0.79 to $39.14, Charts, Fortune 500) and AT&T (up $1.03 to $39.78, Charts, Fortune 500).

Alcoa and others in the sector got a boost from BHP Billiton, after the world's largest miner reported higher-than-expected earnings.

Market breadth was positive and volume was moderate. On the New York Stock Exchange, winners topped losers by close to 4 to 1 on volume of 1.43 billion shares. On the Nasdaq, advancers topped decliners by 7 to 3 as 1.82 billion shares changed hands.

Treasury prices fell, raising the benchmark 10-year note yield to 4.63 percent from 4.59 percent late Tuesday. Bond prices and yields move in opposite directions.

In currency trading, the dollar slipped versus the euro and rose versus the yen.

U.S. light crude oil for October delivery fell 31 cents to settle at $69.26 a barrel on the New York Mercantile Exchange, erasing early gains after the government reported a surprise increase in crude oil supplies.

COMEX gold for December delivery rose $2.50 to settle at $668.70 an ounce.