A Financial Times report that European finance ministers are discussing co-ordinated bank recapitalisations triggered a 4 per cent surge in the S&P 500 in the last 45 minutes of trading.
The S&P 500 had traded as low as 1,074.77 at the start of the day’s session, well into the bear market territory that is defined by a 20 per cent drop from its year high on April 29, but the benchmark index closed up 2.3 per cent at 1,123.94, after the FT report.
Bank stocks led the rebound, with financials in the S&P 500 up 4.1 per cent, reversing an earlier fall of 2.9 per cent.
Morgan Stanley closed up 12.3 per cent at $14.01, having traded beneath $12 for the first time since December 2008, earlier in the session. JPMorgan rose 6.6 per cent to $30.26 and Citigroup rose 5.5 per cent to $24.39.
Regional bank stocks also surged, with Fifth Third Bancorp up 8.6 per cent to $10.64 and Zions Bancorp up 7.8 per cent to $10.64.
“It’s good to see a bounce in stocks. It’s been a one-way street for several days now,” said Michael Kastner, principal at Halyard Asset Management. “But volatility is so high, it’s unclear which way the market will eventually go.”
Utility stocks in the S&P 500 were down 0.5 per cent, the only sector of the S&P 500 to fall.
NRG Energy, the power generator and electricity supplier, fell 1.8 per cent to $19.57 after decreasing its revenue guidance for the quarter on Monday evening, citing bad weather in Texas, which interrupted supply to retail customers.
Northeast Utilities System fell 2.5 per cent to $31.27 and Edison International fell 2.2 per cent to $36.30.
Utility stocks also fell 2.3 per cent on Monday but before that had not had a single day’s fall of more than 2 per cent since early August as investors flocked to defensive names.
The reason appeared to be the heavy selling of an exchange traded fund that tracks the S&P 500’s utility sector.
The Utilities Select SPDR was down 0.5 per cent to $32.66 after three blocks of more than 300,000 shares each were traded in the morning session.
By midday, 10m shares had been traded in the ETF, just short of the full-day average of 11.8m.
“It looks like someone is selling off the utilities ETF,” said Angie Storozynski, energy analyst at Macquarie. “Nothing could convince me to sell utilities at the moment, it’s exactly the protection I would want right now.”
Some traders speculated that the sell-off was due to an institution raising funds to cover short positions as the broader index tumbled in the morning session.
Semiconductor stocks performed strongly with MEMC Electronic Materials up 9.3 per cent to $5.19, Nvidia up 9.2 per cent to $12.90 and the Philadelphia semiconductor index up almost 4.2 per cent.
The moves followed the release of semiconductor sales data for August, which was not as bad as expected.
Romit Shah, a Nomura analyst, warned unit growth was “sub-seasonal” and predicted “another (and likely deeper) round of estimate revisions” but stocks benefited from a relief rally.
That helped the Nasdaq Composite index outperform the S&P 500 and the Dow Jones Industrial Average.
The Nasdaq was up 3 per cent to 2,404.82 while the Dow was up 1.4 per cent to 10,808.18.
Apple fell 0.6 per cent to $372.50 on a lukewarm reception for its latest iPhone model, the 4s, unveiled Tuesday afternoon. Jefferies analyst Peter Misek tipped the stock to turn round on Wednesday.
“The surface is underwhelming because the 4s looks just like the iPhone 4, but underneath the hood there is a lot to be excited about,” he said. Mr Misek also tipped the lower priced 3gs to become a “global blockbuster,” if it is rolled out worldwide at a low price.
The New York Stock Exchange was up 3.5 per cent to $22.75 on reports that the European Commission may block its merger with German exchange Deutsche Börse.
Yahoo rose 6.9 per cent to $14.46 on reports that private equity house Silver Lake and Russian group Digital Sky Technologies have joined Chinese ecommerce site Alibaba in its bid for the internet gateway service.
Material and energy stocks which had been sold off heavily on Monday and last week, also benefited from the late buying. Alpha Natural Resources, the Appalachian metallurgical coal miner, closed up 8.8 per cent to $17.44. Its rival Cliff Natural Resources also jumped 10.6 per cent to $53.41.
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