Stocks jump on merger talk

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

Bond prices slumped, boosting the corresponding yields, as the recent 'flight to safety' by investors seemed to be dissipating, further suggesting worries about the credit market are dampening.

Quick Vote

Is the worst of the stock market selloff over?

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

or View results

The Dow Jones industrial average (up 73.73 to 13,164.59, Charts) jumped 75 points, or 0.6 percent, more than 90 minutes into the session, giving up bigger morning gains. The broader S&P 500 (up 8.07 to 1,455.19, Charts) index gained 0.6 percent and the tech-fueled Nasdaq Composite (up 19.94 to 2,541.24, Charts) index gained 0.7 percent.

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. However, economists believe that the central bank is unlikely to make a cut ahead of the meeting, according to a recent survey.

"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]."

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

Stocks gained Wednesday morning, thanks to those factors and merger speculation, including news that Dubai World, the investing arm of the Dubai government, will buy a 9.5 percent stake in MGM Mirage (up $5.76 to $80.08, Charts, Fortune 500), in a deal worth more than $5 billion.

NYMEX Holdings (up $8.73 to $127.51, 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 $0.52 to $16.87, Charts) and E*Trade (up $0.08 to $15.65, Charts) are in talks to merge.

Less upbeat for the financial sector was news that HSBC (up $1.28 to $90.38, Charts) is closing its Indiana mortgage unit, cutting 600 jobs.

Also, Accredited Home Lenders (down $0.32 to $6.23, 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 $0.99 to $22.08, Charts, Fortune 500) reported slumping earnings and warned about its outlook. However, the luxury homebuilder's earnings were nonetheless stronger than expected, sending shares about 4 percent higher.

Yet, overall gains were broad based, with 24 out of 30 Dow issues gaining, led by Alcoa (up $1.32 to $35.92, Charts, Fortune 500), Caterpillar (up $1.59 to $75.87, Charts, Fortune 500), DuPont (up $0.80 to $48.55, Charts, Fortune 500) and 3M (up $1.07 to $89.05, Charts, Fortune 500).

Market breadth was positive. On the New York Stock Exchange, winners topped losers by over 5 to 1 on volume of 300 million shares. On the Nasdaq, advancers topped decliners by almost three to one as 620 million shares changed hands.

Treasury prices slumped, raising the benchmark 10-year note yield to 4.64 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 87 cents to $68.70 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 $3.80 to $670.90 an ounce.