U.S. Stocks Surge For Second Day As Financials Draw Buyers

NEW YORK (MarketWatch) -- U.S. stocks surged higher for a second day Wednesday, with a reviving financial sector paving the way, after a Federal Reserve official's speech bolstered thinking that another interest-rate cut is coming in the weeks ahead.

"Risk perceptions are falling on the view that the worst is over for the financials," according to Frederic Ruffy, analyst at Optionetics.

"Now you have [Federal Reserve Vice Chairman] Kohn pointing out the Fed can take action to offset what is happening in the financial markets; it does suggest the Fed is being responsive and is not just focused on inflation," said Jeffrey Kleintop, chief market strategist at LPL Financial Services.

"It makes it that much more likely we'll see a rate cut in December," he added.

The Dow Jones Industrial Average gained 290.9 points, or 2.3%, to 13,249.3, with all of the blue-chip index's 30 components ahead, led by the recently battered financial sector.

Of the blue chips, Citigroup Inc. was up 7.3% and American International Group Inc. climbed 5%.

Citigroup's advance follows a Wall Street Journal report that the banking giant had rebuffed a merger proposal from Bank of America Corp.

The broader indexes climbed as well, with the S&P 500 Index recently up 33.25 points, or 2.3%, at 1,461.48, and the Nasdaq Composite Index gaining 70.93 points, or 2.8%, to 2,651.73.

On the New York Mercantile Exchange, crude futures fell $3.62 to $90.80 while gold futures declined $14.1 to $799.9.

Volume on the New York Stock Exchange topped 924 million, and advancing stocks topped declining issues 7 to 1. On the Nasdaq, 1.4 billion shares were exchanged, and advancers outran decliners 11 to 3.

Dove talk

In contrast with more hawkish statements made recently by other Fed officials, Kohn told the Council on Foreign Relations that the central bank's monetary policy should be flexible, offering support for the view of another cut when the Fed meets Dec. 11.

"The market liked what it heard from a Fed governor this morning about the ongoing financial stress in the system. This implies there is an increased likelihood of another rate cut coming," said Elliot Spar, option market strategist at Stifel Nicolaus & Co.

Kohn's speech early Wednesday came after more difficulties emerged in the financial sector.

Wells Fargo & Co. said that it would set aside $1.4 billion to cover losses from the real-estate meltdown, and mortgage buyer Freddie Mac said that it's offering $6 billion in stock and cutting its quarterly dividend.

"Bad news from the financials is no longer a catalyst for fear, panic and indiscriminate selling," said Ruffy.

Data stream

Investor enthusiasm seemed unfazed by word from the National Association of Realtors that sales of existing homes fell 1.2% in October, with the supply of homes on the market hitting a 22-year high.

In data released before the opening bell, the Commerce Department reported orders for U.S.-made durable goods fell 0.4% in October, the third straight monthly decline. The drop was in line with analysts' expectations. .

At 2 p.m. Eastern, the Fed releases the Beige Book of anecdotal data about the state of the economy.

Overseas, European shares recorded the second-best session of the year, with the pan-European Dow Jones Stoxx 600 index rising 2.8% to break a two-session losing streak. .

Asia markets were mixed. .

U.S. stocks bounced back on Tuesday, with a $7.5 billion injection by an Abu Dhabi investment fund into Citigroup giving a boost to the financial sector.

By Kate Gibson