NEW YORK — Wall Street rebounded Tuesday after the Abu Dhabi Investment Authority said it will invest $7.5 billion in Citigroup Inc. — a vote of confidence for one of the nation’s largest banks, which has suffered severe losses amid the ongoing crisis in the mortgage market.
The Dow Jones industrials rose more than 200 points in yet another volatile session as investors were hopeful the financial sector can remain healthy despite the ongoing credit crisis. The banking industry has been battered in recent months as defaults on home loans have risen and rendered some mortgage-backed securities essentially worthless.
Major financial institutions, including Citi and its competitors, have had to book some $80 billion of writedowns on those holdings — a trend that has left the markets nervous about the full extent of the damage from soured loans. Citi’s ability to secure a capital injection raised hope others might be able to do the same.
“The Citi deal is certainly a relief after a series of negative news on Monday with respect to the financials,” said Todd Salamone, director of trading at Schaeffer’s Investment Research.
Funds like Abu Dhabi’s “that have plenty of cash may be viewed as a potential rescuer given the balance sheet troubles the banks are having. A weak dollar makes it that much more possible.”
Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said he won’t be surprised if U.S. economic data over coming months is weak, and warned that recent central bank rate cuts have increased the risk of higher inflation. Meanwhile, Federal Reserve Bank of Chicago head Charles Evans said in a speech that further turmoil in financial markets could cut into business investment and curb consumer spending on big-ticket items.
The Dow rose 215.00, or 1.69 percent, to 12,958.44 after being up nearly 250 points earlier in the session.
Broader stock indexes also moved higher, with the S&P 500 index up 21.01, or 1.49 percent, at 1,428.23, and crept back into positive territory for the year. The technology-heavy Nasdaq composite index was up 39.81, or 1.57 percent, at 2,580.80.
A pullback in oil prices aided the market’s gains. A barrel of light, sweet crude dropped $3.28 to $94.42 on the New York Mercantile Exchange on expectations that the Organization for Petroleum Exporting Countries will raise production at its Dec. 5 meeting.
S&P expects Morgan Stanley will take a $4.2 billion charge, up from an earlier $3.7 billion estimate and projected Merrill will write down 25 percent to 30 percent of its $21 billion of such assets in the fourth quarter. Still, Morgan Stanley shares jumped $1.85, or 3.9 percent, to $49.80, while Merrill shares added $1.84, or 3.6 percent, to $53.07.
“While these announcements from the financial industry are continuing to unsettle investors, the lower dollar has put the U.S. in the position of being for sale at attractive prices, so Abu Dhabi can come along and buy an interest in Citi,” said A.C. Moore, chief investment strategist for Dunvegan Associates in Santa Barbara, Calif. “Anytime you have corporate action, that’s one of the strong bull arguments” for stocks.
