US stocks extended Friday’s rally on Monday as investors welcomed the rescue package for Citigroup and fear retreated as the market digested more details on President-elect Obama’s economic team.

Citigroup shares surged 57.8 per cent to $5.95 in reaction to the US government’s move shortly before midnight on Sunday.

As part of its rescue of Citi, the US government entered an agreement to guarantee up to $306bn in problematic assets and inject $20bn in capital to restore confidence in the ailing bank.

Fears about the possible collapse of Citigroup sent shares of the bank into freefall last week and they closed on Friday down 87 per cent for the year.

News of the aid for Citigroup led to a rally of shares in other banks. Bank of America rose 27.2 per cent to $14.59, while Morgan Stanley leapt 33.13 per cent to $13.38 and Goldman Sachs climbed 26.5 per cent to $65.42 by the close in New York. Morgan and Goldman are being transformed into bank holding companies.

The S&P investment banking index was 25.6 per cent higher at 47 while the S&P financials sector was 18.6 per cent up at 153.38.

Insurance stocks, which were also hard hit last week, enjoyed a solid rebound. Hartford Financial Services leapt 26.1 per cent to $6.24, while Genworth Financial climbed 88.9 per cent to $1.70 and Lincoln National was up 10.5 per cent to $7.03.

All three leading stock market indices posted healthy gains on the back of the Citigroup rescue.

The S&P 500 ended up 6.5 per cent to 851.81 points; the Nasdaq Composite was up 6.3 per cent to 1,472.02 points.

The Dow Jones Industrial Average rose 4.9 per cent to 8,443.39 points.

The Vix index, known as Wall Street’s fear gauge, fell 11 per cent to 64.70, still indicating high levels of distress but some way down on recent highs of more
than 80.

The S&P 500 plunged to an 11½-year low last week before rallying strongly on Friday as details emerged of the likely choices for key positions in President-elect Obama’s administration.

Mr Obama confirmed the nomination of Timothy Geithner, chairman of the New York Federal Reserve as Treasury Secretary and several other members of his economic team. Tobias Levkovich, US equity strategist at Citigroup, pointed out the inopportune timing of the transition period given the economic crisis.

“While politically understandable, the lack of policy clarity at this critical juncture (including auto industry aid) is leaving equity investors uncertain about many initiatives such as approval for the second tranche of the Tarp [Troubled Asset Relief Programme], the use of Tarp money, the details of a new stimulus package, taxes and national energy strategy.”

The auto industry remained in sharp focus with General Motors up
17.3 per cent at $3.59 and Ford up 9.1 per cent at $1.56.

“Equity investors remain unwilling to commit new capital in view of attractive high-grade corporate debt options, awful news in housing, declining commodity prices, growing uncertainty about international economies, and widespread losses after making previous investments that proved premature,” said Mr Levkovich. The result was “extraordinary risk aversion”.

Several items of economic data are due this week and stock market investors will look for direction from reports on consumer confidence and gross domestic product on Tuesday and Wednesday’s reports on unemployment claims, personal income, new home sales and durable goods.

After Thursday’s Thanksgiving holiday, investors will watch the retail sector on Friday in the traditional kick-off to the holiday shopping season. David Kelly, chief market strategist at JPMorgan Funds, said: “In a normal year, the week of Thanksgiving should be a quiet one on Wall Street. This is not a normal year.”

He added that, as the third-quarter earnings season wound down, operating earnings for companies in the S&P had fallen by more than 20 per cent for the fourth consecutive quarter.

“Once the economy finally begins to recover, profits should rebound strongly reflecting subdued labour costs and solid productivity gains,” Mr Kelly said.

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