Stocks soar on US stability plans

New York: US stocks rallied on Friday, led by a surge in financials, after the government unveiled plans to mop up bad assets and place a temporary ban on bets that financial stocks will fall.

In addition, the US Treasury said it will establish a programme to guarantee money market fund holdings, aiming to prevent Wall Street's losses from spilling over into the wider economy.

The Dow Jones industrial average shot up 435.11 points, or 3.95 per cent, to 11,454.80. The Standard & Poor's 500 Index gained 53.84 points, or 4.46 per cent, to 1,260.35. The Nasdaq Composite Index leaped 77.17 points, or 3.51 per cent, to 2,276.27.

The rally restored the blue-chip Dow average back to just above the break-even point for the week, after being off nearly 1,000 points since last Friday during the market's earlier plunge.

The rally, coming a day after Wall Street scored its best day in six years, drove shares of Bank of America, the No. 2 US bank, up 21.6 per cent to $37.17, making the stock the top boost to the Dow and the second-biggest advancer in the S&P 500.

The S&P financial index jumped 10.9 per cent.

Led by Treasury Secretary Henry Paulson, officials are working on a solution to take over hundreds of billions of dollars worth of soured bank assets that have crippled the global financial system.

In another bid to stabilise markets, US securities regulators joined regulators from other countries in temporarily banning short sales of financial shares.

In the announcement, the Securities and Exchange Commission said it was acting in concert with the UK Financial Services Authority in taking emergency action to "prohibit short selling in financial companies" to protect the integrity of the securities market and boost investor confidence.

"The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets," SEC chairman Christopher Cox said in a statement.

The stabilisation measures helped calm nerves on the last day of a tumultuous week in which Lehman Brothers Holdings filed for bankruptcy protection and the US government bailed out insurer American International Group.

European shares surged yesterday to their biggest one-day percentage gain on record.

The FTSEurofirst 300 index closed 8.2 per cent higher at 1,150.78, recouping some of the sharp losses from earlier in the week and notching up the biggest one-day percentage gain on record, according to Thomson Reuters data. The benchmark was still down 0.9 per cent for the week, and is down 23.6 per cent so far in 2008.

Asian stock markets were also soaring after a punishing week as the news of the US government plan to rescue banks from risky mortgage debt brought hope of a letup in the financial crisis.

Hong Kong's Hang Seng Index surged a stunning 9.61 per cent to 19,327.73, while Japan's Nikkei 225 average was up 3.8 per cent at 11,920.86.

In China, the Shanghai benchmark jumped 9.5 per cent to 2,075.09 as encouraged investors resumed buying following a government decision to cut a tax on share purchases and to buy up shares in state-owned lenders.

Stock measures in Taiwan, South Korea and Australia were also higher.

EXPLAINED

What is short selling?

It is when investors bet on particular share prices falling rather than rising. This can be done in various ways including borrowing shares from large institutions to sell and buy back when they are cheaper as well as spread bets and options.

What has been banned? Increasing existing short positions or creating new short positions in banks and insurance companies.

When did it come into force? Midnight last night. It is planned to last until January 16.

Which companies' shares are included? The Financial Services Authority named 29 companies including all the main high street banks and large insurance companies.

Why is the FSA doing this? Regulators around the world believe that short-sellers have deliberately targeted companies like HBOS and Lehman Brothers and forced them into rescue takeovers or even into bankruptcy. It says this has "given rise to disorderly markets".

How will it work? Anyone with a short position in any of the 29 companies which is equivalent to 0.25% or more of the shares will have to make it public through a notice to the Stock Exchange.

Does that apply to existing positions? Yes. Investors, hedge funds and fund managers have until 3.30pm on Tuesday to reveal their short positions. Many will close those positions now rather than be exposed publicly.

— The Telegraph Group