Stocks up on mergers, Fed hopes

NEW YORK (CNNMoney.com) -- Stocks jumped Wednesday afternoon, as takeover talk and bets that the Federal Reserve will cut interest rates next month soothed 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.

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The Dow Jones industrial average (up 77.07 to 13,167.93, Charts) rose 80 points, or 0.6 percent, with 3-1/2 hours left in the session. The broader S&P 500 (up 7.85 to 1,454.97, Charts) index gained 0.5 percent and the tech-fueled Nasdaq Composite (up 16.41 to 2,537.71, Charts) gained 0.6 percent. All three major gauges had posted bigger morning gains.

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. Last week, the central bank cut the largely symbolic discount rate - which impacts banks.

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

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]."

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.

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 $6.83 to $81.15, Charts, Fortune 500), in a deal worth more than $5 billion.

NYMEX Holdings (up $7.52 to $126.30, 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 $0.20 to $16.55, Charts) and E*Trade (down $0.10 to $15.47, Charts) are in talks to merge.

Less upbeat for the financial sector was news that HSBC (up $1.09 to $90.19, Charts) is closing its Indiana mortgage unit, cutting 600 jobs.

Also, Accredited Home Lenders (down $0.40 to $6.15, 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 $0.72 to $21.81, 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 3 percent higher.

Yet, overall gains were broad based, with 22 out of 30 Dow issues gaining, led by Alcoa (up $1.18 to $35.78, Charts, Fortune 500), Caterpillar (up $1.37 to $75.65, Charts, Fortune 500), DuPont (up $1.04 to $48.79, Charts, Fortune 500), 3M (up $1.00 to $88.98, Charts, Fortune 500) and AT&T (up $0.67 to $39.42, 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. On the New York Stock Exchange, winners topped losers by over 4 to 1 on volume of 700 million shares. On the Nasdaq, advancers topped decliners by 2 to 1 as 900 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 32 cents to $69.25 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 $3.60 to $669.80 an ounce.