Financials make Wall Street spirits bright

NEW YORK (CNNMoney.com) -- Stocks held gains Monday afternoon as news from Merrill Lynch helped boost the financial sector and an upbeat retail sales report suggested consumer confidence is stronger than expected.

The Dow Jones industrial average (INDU), S&P 500 index (SPX.X) and the Nasdaq (COMPX) all gained 0.6 percent with one hour left in the session.

Trading volume is expected to be light Monday; markets will close three hours early and remain closed Tuesday for the Christmas holiday.

"The big news of the day are these investments in investment banks by sovereign wealth funds," said Brian Gendreau, investment strategist at ING Investment Management.

Merrill Lynch (MER, Fortune 500), which has been battered by the credit crisis, announced early Monday that it will sell a $4.4 billion stake to Temasek Holdings, Singapore's state-owned investment company, and $1.2 billion to a U.S. advisory firm.

In recent weeks, a number of big Wall Street investment banks - including Morgan Stanley, Citigroup Inc and UBS - have received capital infusions from foreign government investment entities to help offset subprime related losses.

And the markets appear to be reacting favorably to the trend.

"The financials are leading the way today...suggesting that the market is seeing some buying opportunities there," notes Gendreau.

Shares of Merrill Lynch were up nearly 4 percent in early trading, but they were trading down about 3% with about 30 minutes left in the session.

A Wachovia (WB, Fortune 500) analyst lowered his earnings forecast for Merrill Lynch Monday morning, warning that more writedowns could be in store for the company that has already reported close to $8 billion in losses due to souring mortgage backed securities.

Other financials like, Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500) and JP Morgan (JPM, Fortune 500) were able to hang on to gains.

Merrill Lynch also announced Monday that it will sell its commercial finance unit, Merrill Lynch Capital, to the finance branch of General Electric. Terms of that deal were not disclosed.

In other news, retailers are reporting strong sales for Sunday's pre-holiday shopping frenzy, signaling stronger consumer confidence than previously thought.

Treasury prices fell, raising the yield on the 10-year note to 4.21 percent from 4.16 percent late Friday. Treasury prices and yields move in opposite directions.

U.S. light crude oil for January delivery fell 76 cents to $92.55 on the New York Mercantile Exchange.

In currency trading, the dollar fell versus the euro and gained against the yen.

COMEX gold for February delivery rose $1.40 to $816.80 an ounce.