Global stocks, dollar rally on U.S. takeovers

By Herbert Lash

NEW YORK (Reuters) - Global stocks and the dollar soared on Monday in reaction to the U.S. government's seizure of Fannie Mae and Freddie Mac, but lingering concern about whether this will help end the global credit crisis cut some of the initial gains.

Stock markets surged worldwide on hopes the U.S. Treasury's plan to seize the companies -- which together back about half of the $12 trillion in U.S. home mortgages -- might stabilize financial markets that have suffered now for more than a year.

Government bond prices in Asia, Europe and the United Stages at first fell after the massive step was announced on Sunday to prop up the ailing U.S. housing market. But U.S. Treasury debt prices later turned higher on technical moves to stabilize mortgage portfolios and bond maturities.

Sterling fell to its lowest in more than two years against a broadly stronger U.S. dollar, pressured by UK data showing factory inflation may have peaked and the decision to seize Fannie Mae and Freddie Mac.

The dollar rallied to a one-year peak against a basket of six major trading currencies, gaining 1.3 percent on the day, according to Reuters data. The euro fell to a session low of $1.4055, the lowest in about 11 months.

Oil prices, meanwhile, rose slightly as Hurricane Ike took aim at the U.S. cluster of offshore rigs in the Gulf of Mexico, most of which remain paralyzed in the wake of Gustav last week.

The bailout sparked widespread euphoria with regional equity benchmarks in Asia surging more than 4 percent and more than 3 percent in Europe and the United States, before U.S. markets pared the initial strong gains.

The rally was in response to shrinking capital bases at Fannie and Freddie, which has undermined investor sentiment worldwide since their financial assets were widely held by foreign governments, banks and individuals.

"It definitely draws a line in the sand and should help credit conditions, but we still need the underpinnings of the housing market to show stability or improvement before we can say the credit crisis is behind us," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

Financial shares surged on the news, with leading banks in Britain posting double-digit gains and U.S. banks leading the Dow and S&P 500 higher on hopes the U.S. government's move would help stabilize a slumping U.S. housing sector.

Any recovery in U.S. home prices will be largely dependent on the health of Fannie and Freddie, which are the biggest providers of housing finance in the United States.

"We've had a major uncertainty removed form the market - both in the U.S. and globally," said Al Goldman, chief market strategist at Wachovia Securities in St. Louis. "It was critical for the government to step in. Does it solve all our problems? No. But it's a strong step in the right direction."

The Nasdaq, which had rallied more than 2 percent in early trade, slipped briefly into negative territory on a decline in semiconductor shares. An index on the group fell 0.12percent, paring much bigger losses.

The Dow Jones industrial average .DJI closed up 290.43 points, or 2.59 percent, at 11,510.74. The Standard & Poor's 500 Index .SPX rose 25.49 points, or 2.05 percent, at 1,267.80. The Nasdaq Composite Index .IXIC added 13.88 points, or 0.62 percent, at 2,269.76.

European shares surged, led by financials, on the takeover news. The London Stock Exchange (LSE.L: Quote, Profile, Research, Stock Buzz), Europe's leading equities market as measured by volume, suffered from connectivity problems which hampered trading for most of the session.  Continued...