European, Asian markets rebound

LONDON - European and most Asian stock markets rebounded Tuesday as investors cheered an overnight rally on Wall Street and snapped up beaten down shares on expectations of a U.S. interest rate cut later this week.

But growing speculation that the Federal Reserve will lower a key rate by a quarter point, instead of the more aggressive half-point, kept gains in check.

European shares rose in early trading and U.S. stock index futures were mixed.

The U.K.'s FTSE 100 Index grew 1.5 percent to 5,872.50, while Germany's DAX gained 1.1 percent to 6.893.59. The French CAC rose 1.8 percent to 4,935.50.

"The FTSE rebounded this morning after yesterday's losses, led by the mining sector which is adding 20 points to the index on the back of record precious metals prices," said Nathan Miller, a trader at CMC Markets in London.

In Asia, Japan's benchmark Nikkei 225 index rose 2.9 percent at 13,478.86 while Hong Kong's blue-chip Hang Seng Index gained 1 percent to 24,291.8 after earlier rising as much as 2.8 percent. The markets — Asia's two biggest — tumbled at least 4 percent Monday on persistent fears the U.S. economy was entering a recession.

Monday's drop gave investors a chance to re-enter the market, said Francis Lun, a general manager at Fulbright Securities in Hong Kong.

In China, the benchmark Shanghai Composite Index rose 0.9 percent after tumbling 7.2 percent Monday. Stocks in South Korea, Thailand and the Philippines also rose.

Australia's benchmark index slid 2.5 percent as traders bet on a smaller-than-hoped-for rate cut when the Fed's policy planners meet Tuesday and Wednesday. Last week, the Fed slashed its key interest rate by three-quarters of a point to 3.5 percent after a plunge in Asian and European markets, which have since bounced back somewhat.

The Fed was likely to cut rates a quarter point "given the deep cut last time and that there are some signs of stabilization in the market," said Malcolm Wood, Asia-Pacific equities strategist at Morgan Stanley in Hong Kong.

That would likely disappoint Asian markets where investors banked on a bigger cut, and could trigger more selloffs later in the week, he said.

Global markets have been in turmoil this month as investors reacted to a string of bad economic news out of the United States. Asian markets are especially sensitive as their economies are heavily reliant on American consumers buying their exports.

The U.S. economy has been battered by a housing slump and credit crunch triggered by a spike in defaults on risky mortgages that has led to billions of dollars of bad assets at major American and European banks.

Sentiment got a lift from Wall Street's gain on Monday, when investors in the U.S. took a dismal new home sales report as a sign the Federal Reserve will lower interest rates. The Dow Jones industrial average rose 176.72, or 1.45 percent, on Monday to 12,383.89, while the Standard & Poor's 500 index rose 23.36, or 1.76 percent, to 1,353.97.

President Bush tried to calm the markets in his last State of the Union address Monday, stressing the government's determination to reinvigorate the moribund economy with tax rebates.

Bush urged lawmakers to approve a $150 billion (102 billion euros) plan in tax relief for families and incentives for businesses to invest in new plants and equipment. He said the American economy was robust, but warned of a rocky road ahead in the short-term.

In Hong Kong, gainers included export-related stocks such as Li & Fung, which jumped 5.7 percent. Clothing maker Esprit Holdings was up 3.4 percent.

China coal stocks listed in Hong Kong also gained on expectations that the prolonged and unexpectedly severe winter across China will drive demand for more coal. China Coal was up 1.4 percent, while China Shenhua was up 1.7 percent.

In Tokyo, steel and bank issues were among Tuesday's gainers. Kobe Steel rose 2.3 percent and Shinsei Bank jumped 9.4 percent.

U.S. stock index futures were mixed hours before New York opened trading Tuesday. Dow futures were up 11 points, or 0.1 percent, at 12,388, while S&P 500 futures were up 2.4 points, or 0.2 percent, to 1,357.1. Nasdaq Composite futures were down 6.25 points, or 0.35 percent, to 1,804.

US rate cut hopes boost Asian stocks

Many Asia Pacific stock markets bounced back strongly on Tuesday, tracking overnight gains on Wall Street on fresh optimism that the US Federal Reserve will cut interest rates on Wednesday, though gains trailed off as trading drew to a close.

Gold and platinum hit fresh highs as production in South Africa looked like it will continue to be disrupted by labour troubles and power shortages. Gold for immediate delivery hit $929.84 an ounce and the key platinum futures contract in Tokyo rose by its daily limit of Y120 to Y5,555 a gram. But both metals fell back during the afternoon session. Australian stocks sagged as many of the country's biggest miners have large operations in South Africa.

Tokyo led markets higher, helped by broadly encouraging jobless numbers. Vacancies fell to a two-year low and the unemployment rate stayed the same at 3.8 per cent last month.

The Nikkei 225 average closed 3 per cent higher at 13,478.86 and the broader-based Topix index was up 2.8 per cent at 1,328.73

"The Japanese data were a mixed bag with employment holding steady in the middle of the range for the last year," said David Cohen, head of Asian economic forecasting at consultancy Action Economics in Singapore. "Retail sales for the whole year were no great shock as they were up by just one-tenth of a percent. That just highlights Japan's dependence on exports."

Nintendo, the games maker, jumped 5.9 per cent to close at Y49,550. Carmaker Honda Motor (NYSE:HMC) rose 3.8 per cent to Y3,260 after saying US profits may rise on higher sales of fuel-efficient cars. Rival Nissan Motor (NASDAQ:NSANY) was up 1.9 per cent at Y985.

Revived demand for equities wiped out most of the gains Japanese bond prices made on Monday. Comments by the Bank of Japan governor, Toshihiko Fukui, that growth would continue but at a slower pace did not help. The 10-year Japanese government bond dropped 0.6 to 100.301, boosting the yield to 1.465 per cent.

In Hong Kong, the prospect of lower US interest rates helped property developers and banks as borrowing costs in the territory track American moves because of the Hong Kong dollar's peg to the US currency. Investors largely shrugged off comments by Joseph Yam, the head of the Hong Kong Monetary Authority, that the subprime crisis would slow growth in the territory.

The Hang Seng index closed 1 per cent higher at 24,291.80, off the day's highs. HSBC gained 1 per cent to HK$117.60 and Sun Hung Kai Properties jumped 3.9 per cent to HK$159.70.

Mainland Chinese shares managed to claw back a little of Monday's big loss. Shanghai's composite index gained 0.9 per cent to close at 4,457.94 after sliding 7.2 per cent the previous session. The market is still down 15.3 per cent since the start of the year.

Transport shares fell again heavy snow falls continued to cause disruptions ahead of next week's lunar new year holiday, a traditionally heavy travel season. China Eastern Airlines (NYSE:CEA) dropped 2.5 per cent to Rmb15.23 and Daqin Railway slid 5.7 per cent to Rmb21.12.

Australian shares suffered from the uncertainty on commodity markets. Equities were also catching up on the falls elsewhere in the region on Monday, when Sydney markets were closed for a public holiday. The S&P/ASX 200 index closed 2.5 per cent lower at 5,716.50 by mid-afternoon.

BHP Billiton (NYSE:BHP), the world's largest mining company, fell 3 per cent to A$35.70 as difficulties in producing precious metals spread to nonferrous operations as well. BHP's rival and takeover target, Rio Tinto, lost 4.2 per cent to A$113.57.

Asset manager Allco Finance, whose shares slumped 29 per cent last week, was one of the biggest gainers in Sydney. Allco shares surged 25 per cent in the first hour of trading after lenders and executives reached an agreement to stop forced selling of shares to meet margin calls. Allco closed up 6.5 per cent at A$3.62. The shares have halved in value in just over a year.

Among other markets, Singapore turned lower in the afternoon and was off 0.1 per cent in late trading. South Korea ended up 0.7 per cent while Taiwan added 1.2 per cent. Mumbai was up 0.3 per cent in the afternoon, paring gains after the Indian central bank left interest rates on hold despite some expectations of a reduction to mirror the US Fed's cut.

FTSE recovers on record metals prices

London equities rose in opening trade on Tuesday, with mining stocks boosted by record prices for gold and platinum.

Banks added their weight to the rebound after an upbeat trading statement from mortgage lender Alliance & Leicester.

The FTSE 100 started the session 0.8 per cent higher at 5,832.6, a rise of 43 points. The FTSE 250 rose 0.9 per cent to 9,725.0, an advance of 85 points.

European markets also made gains, helped by strengthening banking stocks across the continent. Selling in the wake of the trading at Société Générale had left much of the sector looking undervalued.

The FTSE Eurofirst 300 moved 0.7 per cent higher to 1,326.1 with the CAC 40 in Paris 0.8 per cent stronger at 5,886.9 and the Xetra Dax 30 in Frankfurt up 0.7 per cent to 1,326.2.

Gold and platinum prices broke new ground for the third consecutive session as growing hopes for a US rate cut ahead of the US Federal Reserve's meeting this week soothed fears about prospects for global economic growth.

Spot platinum reached $1.735 per troy ounce with February Comex gold futures touching $930. Silver moved to 27-year highs at $16.76.

The news helped miners make fresh gains. Xstrata rose 4 per cent to £36.55, Anglo American was 3.6 per cent higher at £25.55 and Lonmin was 2.9 per cent stronger £29.50.

Banking stocks added to the improving sentiment after A&L said full-year trading for 2007 looked set to meet expectations.

The mortgage lender also confirmed it had funded its maturing medium-term wholesale funding, commercial paper and certificates of deposit to the end of 2008. Its shares rose 1.5 per cent to 736p.

HSBC was 1.2 per cent stronger at 765p, Lloyds TSB was up 1.4 per cent at 428p and Barclays (NYSE:BCS) was 1.1 per cent stronger at 488.3p.

Tui lifted tour operators to the top of the leaderboard with a strong trading statement, soothing fears about uncertain consumer spending.

Tui said its current performance remained "strong" and that it expected cost savings from its merger with First Choice Holidays to rise by 50 per cent from original estimates to £150m. Its shares rose 4.2 per cent to 249p. Thomas Cook was 5.5 per cent higher at 260p.

BSkyB shrugged off a ruling that it reduce its 17.9 per cent stake in ITV to a level below 7.5 per cent. The decision would cost BSkyB about £250m at ITV's Monday closing price. BSkyB was up 0.3 per cent at 532½p whilst ITV rose 1.9 per cent to 73.4p.

China Mobile eyes more overseas acquisitions

BEIJING (AFP) - China Mobile, the country's top wireless operator, said Tuesday it planned to take advantage of the global stock market downturn to acquire overseas telecom firms that have now become cheaper.

"(China Mobile) would like to acquire high-quality and profit-making telecommunications enterprises overseas," Lei Yu, a spokeswoman of China Mobile's Hong Kong-listed unit, told AFP.

She declined to provide any timetable for the expansion.

The official China Securities Journal reported Tuesday that the company was eyeing some relatively small telecom companies in other Asian markets as declining stock market had resulted in lower prices.

"With the market capitalisation of these firms dropping, we will have the chance to strike more deals," the report said, citing Wang Jianzhou, president of China Mobile Communications Corporation.

"We've been watching closely emerging markets," Wang said at the annual meeting of the World Economic Forum in the Swiss resort of Davos.

So far China Mobile has made only one overseas takeover, buying an 88.86-percent stake in Pakistan's fifth-largest mobile operator Paktel for 284 million dollars in January 2007.

Big Durables Gain Signals U.S. Health As Fed Mulls Policy

U.S. durable goods orders surged in December while other economic reports were weaker Tuesday, creating uncertainty about how much the Federal Reserve might cut interest rates on Wednesday.

New orders for big-ticket, long-lasting items rose 5.2%, the most since July, on strong demand for aircraft, machinery and communications gear, the Commerce Department said. Wall Street expected a 1.5% gain.

Nondefense capital goods orders ex aircraft, a proxy for business investment, jumped 4.4%, the most since March.

The report suggested the economy may not be so bad off after all.

"Recession fears have been exaggerated," said Richard DeKaser, chief economist at National City Corp.

It gave Fed policymakers something else to think about as they started their two-day meeting.

Futures traders now see a 74% chance of a large cut vs. 26% for a quarter-point ease.

The Fed already has slashed rates by 1.75 percentage points since September, including a surprise 75-basis-point cut last week. That followed a wave of bad economic news, including spiking unemployment, declining retail sales, faltering factories and a continued dive in home sales and prices.

But many analysts said talk of a downturn has been overblown.

"Between the durable goods and the consumer confidence, it doesn't point 15 the economy currently being in recession," said Joel Naroff, president of Naroff Economic Advisors.

January's Consumer Confidence Index fell 2.7 points to 87.9, the Conference Board said Tuesday. That's just above November's four-year low, slightly above forecasts.

Americans were a little more upbeat about current conditions, but gloomier about the future.

The share of respondents optimistic about future jobs conditions hit a 17-year low in January.

The housing recession also has weighed on sentiment. The latest data out Tuesday won't help.

Home prices in 20 U.S. cities fell 7.7% in November vs. a year ago, while prices in 10 major metro areas dived a record 8.4%, according to the widely respected S&P/Case-Shiller indexes. Miami and San Diego had the biggest declines.

There's no sign of a bottom, either. Monthly declines have accelerated for the past six months.

Also, foreclosure filings shot up 75% in 2007 to 2.2 million and the home ownership rate fell to a 51/2-year low, other data showed.

Yet many analysts urged the Fed not to go too far, too fast.

"The Fed has done a great deal already," DeKaser said. "Given the usual lags of cuts on the economy ... the Fed needs to be patient so as not to get too far ahead of itself."

Economists say it generally takes about 12 months or more for the effects of rate cuts to be felt.

There's also concern that last week's emergency cut, coming right after a global stock sell-off, gave the impression that the Fed was reacting more to financial markets than economic reality.

"The Fed is not being viewed as the leader but as a follower. They need to be in control," Naroff said.

Meanwhile, the U.S. House overwhelmingly OK'd a $146 billion economic stimulus package endorsed by President Bush. But the Senate is likely to make changes.

GDP data out Wednesday before the Fed's decision likely will show that the U.S. economy expanded at a 1.2% annual rate in the fourth quarter, down sharply from the robust 4.9% pace in the third.

The Fed also may have a general idea of what's in the January jobs report, due out Friday.

House approves economic recovery plan

WASHINGTON - The House, seizing a rare moment of bipartisanship to respond to the economy's slump, overwhelmingly passed a $146 billion aid package Tuesday that would speed rebates of $600-$1,200 to most taxpayers.

The plan, approved 385-35 after little debate, would send at least some rebate to anyone with at least $3,000 in income, with more going to families with children and less going to wealthier taxpayers.

It faced a murky future in the Senate, though, where Democrats and some Republicans backed a larger package that adds billions of dollars for senior citizens and the unemployed, and shrinks the rebate to $500 for individuals and $1,000 for couples. That plan, written by Finance Committee Chairman Max Baucus, would deliver checks even to the richest taxpayers, who are disqualified under the House-passed measure.

Both versions would provide tax breaks to businesses to spur equipment and other purchases.

President Bush and House leaders urged the Senate to take the bipartisan agreement and pass it quickly, even as Baucus, D-Mont., planned a Wednesday vote in his committee on a larger package that could face a slower path.

"We need to get this bill out of the Senate and on my desk," Bush said in the Oval Office.

Congressional leaders are aiming to send the measure to Bush by Feb. 15. But the divergent plans — and bids by Senate Democrats and Republicans to swell the package with more add-ons — could drag out that schedule.

House Speaker Nancy Pelosi, D-Calif., said she hoped the Senate would "take this bill and run with it."

Senate Majority Leader Harry Reid, D-Nev., said that was unlikely in the freewheeling Senate, where members have elaborate wish-lists for adding to the bill, including food stamps, Medicaid and heating assistance for low-income people and spending on infrastructure projects, among other things.

"I think that there's 51 Democratic senators without exception who believe this package can be made better," Reid said, adding that he also expected to have enough GOP support to change it.

Sen. Mitch McConnell, R-Ky., the minority leader, said reopening the deal would be inappropriate.

"This is not a time to get into some kind of testing of wills between the two congressional bodies. This is a time to show we can rise above partisanship, do something important, and do it quickly," McConnell said.

The House plan brought together Democrats and Republicans, both of whom surrendered cherished proposals to reach a deal.

Pelosi cautioned against adding items that could hinder an economic recovery or scuttle the bipartisan agreement.

"It's important that this bill not get overloaded. I have a full agenda of things I would like to have in the package, but we have to contain the price," Pelosi said. "We made a decision, because that's where we could find our common ground."

Republican leaders, too, described the measure as an imperfect compromise that would provide a needed jolt to the economy.

Americans "expect us to find ways to work together, not reasons to fight with each other," said Rep. John A. Boehner, R-Ohio, who forged the agreement with Pelosi in consultation with Treasury Secretary Henry M. Paulson.

"The sooner we get this relief in the hands of the American people, the sooner they can begin to do their job of being good consumers," Boehner said.

The measure would send rebates to some 111 million people, including roughly 35 million families who don't make enough to pay income taxes. Individuals with adjusted gross income of $75,000 and couples making $150,000 would get rebates equal to the taxes they paid, up to $600 for individuals and $1,200 for couples. Those making more than that would see their rebate go down by 5 percent of every dollar of income over the limits.

Taxpayers would get at least $300, even if they paid less than that in taxes — or $600 for couples. That's also the case for those who don't pay income taxes but earn at least $3,000.

All eligible people would get an additional $300 per child.

In the Senate, Baucus' proposal removes the income caps and would send rebates to some 20 million senior citizens not covered by the House plan because they don't have income.

Reid blasted the proposal to send rebates to those with higher incomes, saying it "causes me to want to gag." The feeling is widespread among Democrats, he added, saying the "the gag reflex is coming upon everybody" over the plan.

Baucus' plan also extends unemployment payments for 13 weeks for those whose benefits have run out, with 26 more weeks available in states with the highest jobless rates.

The Senate measure would restore a business tax break dropped during the House negotiations that would permit corporations suffering losses now to reclaim taxes previously paid.

Both packages include roughly $50 billion worth of tax incentives for businesses to invest in new plants and equipment.

Baucus said he, too, wanted to avoid burdening his proposal with extras.

"The more that this is kept slimmed down and it's clean and simple, the better. I do not want it loaded up with lots of other provisions," Baucus said. "Nobody wants to be held responsible for stopping this from going through."

To address the mortgage crisis, the House bill would raise the limit on Federal Housing Administration loans from $362,790 to as high as $729,750 in expensive areas, allowing more subprime mortgage holders to refinance into federally insured loans. To widen the availability of mortgages nationwide, it also would boost the cap on loans that Fannie Mae and Freddie Mac can buy, from $417,000 up to $729,750 in high-cost markets. Those measures would expire at the end of the year.

Sen. Charles Schumer, D-N.Y, said Tuesday that he plans to ensure those changes are part of the Senate stimulus bill.

Time to Purchase a House?

"Name your price!"ADVERTISEMENT

--from a recent condominium ad by Hovnanian Homes

Thanks to a positively dismal report on new-home sales last year, buyers can pretty much take their pick of about half a million unsold new homes now on the market.

But with sales down by 26 percent from a year ago--and by nearly half since their 2005 peak--just be sure you're ready to follow through with that low-ball offer, because home builders are so desperate these days that they very well may say yes.

That said, even if they throw in granite countertops and a finished basement, your dream house may be no deal if home prices continue to fall, which remains a distinct possibility. "There is no sign of a bottom in any of these data," Ian Shepherdson, chief U.S. economist for High Frequency Economics, says of unsold home inventory levels that now stand at a 9.6-month supply, 2� times what they were during the boom years.

If, for example, you bought a new home a year ago for $245,400 (the nation's median new-home price), chances are that you paid about $13,000 more than you could buy a comparable home for today, or about 5 percent. And as the recent surge in foreclosed homes begins to hit the market this spring, the resulting glut "should depress prices further," adds Joseph Brusuelas, chief economist at IDEAglobal.

That's especially true in so-called exurban areas like California's Central Valley and the Punta Gorda area in Florida, where the drop in home prices has been most precipitous and where foreclosures are still on the increase. On the opposite end of the spectrum, close-to-the-action areas like Washington, D.C., where stable job growth and relatively fast commutes have minimized the downturn, may soon present buyers with opportunities. "It will only be a matter of time before buyers in these places get off the fence and start to bid up prices again," says Mark Fleming, chief economist for First American Core Logic.

Although he, too, believes the overall market has yet to bottom, he says the recent swoon in mortgage interest rates--with rates on a 30-year fixed mortgage now approaching 5.5 percent--provides further incentive to take the plunge. "For people who plan to stay in their houses for a while, it's not going to matter much whether the market has hit bottom because it'll go back up by the time they're ready to sell."

It's like being a value investor in the stock market. Once you see a bottom on the horizon, "then it's time to get in," he says.

Although no one is sure exactly when that will be, most economists agree that we're finally getting close.

Dollar moves higher on US durable goods, consumer data

NEW YORK (AFP) - The dollar traded mainly higher Tuesday as better-than-expected data on US durable goods orders raised prospects the Federal Reserve will avoid an aggressive interest rate cut this week.

The single European currency was at 1.4774 dollars around 2200 GMT, down from 1.4782 late Monday in New York.

The dollar was at 107.07 yen, up from 106.87.

The currency market remained fixated on a Fed decision Wednesday that many analysts have predicted could mean a reduction of as much as half a point in the benchmark federal funds rate in the face of slowing US economic growth.

"No one believes that the outcome of the Federal Reserve meeting will be dollar bullish," said Kathy Lien, chief strategist at Forex Capital Markets.

"Don't expect the next rate cut to be the Fed's last. At minimum, US interest rates will come down to 2.50 percent before this easing cycle is over," she said.

The Federal Open Market Committee (FOMC) made an emergency rate cut a week ago to ward off recessionary risks, slashing the fed rate by a record three-quarters of a percentage point, to 3.5 percent.

US data published Tuesday muddied the outlook for the scale of a likely rate cut.

US orders for durable goods in December rose 5.2 percent from November, their sharpest gain since July 2007.

The performance was well above market expectations of a rise of 1.6 percent, placing a question mark over suggestions that the United States could slip into recession.

"Today's durable goods report is a solid poke in the eye for the (economic) hard-landing camp," said Michael Woolfolk at the Bank of New York Mellon.

"This is the first of what is likely to be a set of data this week indicating that although the US economy is decelerating, it is still well from recessionary conditions," he said.

US consumer confidence data, meanwhile, showed a decline in January compared with December but the slide was less pronounced than the market had anticipated.

The Conference Board's confidence measure fell to 87.9 in January from 90.6 in December, beating forecasts of a decline to 87 points.

"Not surprisingly, consumer confidence is fading rapidly, but a similar decline in spending might not occur if the labor market holds up," said Joel Naroff of Naroff Economic Advisors.

"But the decline was not due to any deterioration in the current economy. Rather it was all due to fears of the future," he said.

In late New York trading, the dollar was at 1.0935 Swiss francs, up from 1.0890 late Monday.

The pound was at 1.9892 dollars, up from 1.9842.

Wall Street edges up on earnings

US stocks advanced again on Tuesday as some better-than-expected corporate earnings and a surprising jump in durable goods orders helped boost fragile sentiment on Wall Street.

Equities ploughed a narrower trading range than in recent days as investors awaited Wednesday's Federal Reserve Open Market Committee decision on interest rates.

Traders found strength in telecommunications, homebuilders and financial companies, while transport stocks became one of the few sectors to move into positive territory for the year. However the technology again lagged the market as concerns about growth prospects continued.

The S&P500 closed up 0.6 per cent at 1,362.30. The Dow Jones Industrial Average rose 0.8 per cent to 12,480.30 while the Nasdaq Composite gained only 0.4 per cent to 2,358.06.

Many analysts are cautious on the near-term outlook for stocks amid fears of a US recession, further writedowns in the financial sector and continued uncertainty surrounding bond insurers.

"We are still to be convinced that the strategic case for equities has improved sufficiently," said David Shairp, global strategist at JPMorgan Asset Management. In order to make a stronger case, Mr Shairp said the market needed to see "central banks ease, the banking system recapitalises itself, equity valuations are compelling and technical indicators are supportive".

But others have pointed to signs of improvement, with the S&P avoiding late-session sell-offs in four of the past five trading days.

"The market has shown a little bit of stability over the last few sessions," Richard Sparks, senior equities analyst at Schaeffer's Investment Research, said. "The Fed holds a big wild card - they have the power to make or break the market."

In spite of delivering a 75 basis point cut last week, the Fed is expected to continue easing rates on Wednesday with the futures market pricing in a 72 per cent likelihood of a 50bp cut. Traders have warned that any deviation from this line could spark another sell-off in equity markets.

Tuesday's economic news was dominated by a larger-than-expected rise in durable goods orders, which provided solace to investors fearing a manufacturing slump. Orders for big ticket items rose 5.2 per cent in December against a forecast gain of 2.1 per cent.

Among Dow components benefiting from the improved outlook were Boeing (NYSE:BA), up 4.3 per cent at $80.96, and Caterpillar (NYSE:CAT), up 1.1 per cent at $68.99.

"There is no doubting the strength of the December data but there is plenty of doubting how sustainable this is and what this says about future trends," Alan Ruskin, chief international strategist at RBS Greenwich Capital, said.

Other analysts were more upbeat. TJ Marta, fixed income strategist at RBC Capital Markets said: "We are witnessing the positive impact of the cheap US dollar on the economy, and the reason we only believe the economy will flirt with recession rather than falling into a full fledged one."

There was little sign of optimism for US consumers after the S&P/Case-Shiller 10-city home price index fell a record 8.4 per cent in the year during November, an 11th straight monthly decline. Meanwhile the latest reading of the Conference Board's US consumer confidence index fell from an upwardly revised 90.6 to 87.9 in January, slightly better than expected.

Earnings news was more upbeat, with 20 of 26 S&P500 companies reporting results before the close beating estimates.

An exception was Countrywide Financial (NYSE:CFC), which posted a wider-than-expected $422m loss after the mortgage lender set aside $924m to cover rising loan losses. In spite of the loss, the shares rose 6.1 per cent to $6.31 after Bank of America's chief executive said its takeover was a "go".

Also in the financial sector, American Express (NYSE:AXP), up 0.8 per cent to $47.80, posted a 10 per cent decline in net income as it set aside a $438m charge to cover bad loans.

Meanwhile bond insurers including Ambac Financial, up 16.2 per cent at $12.93 rallied on hopes they may keep their triple-A ratings.

In industrials Dow Chemical (NYSE:DOW)said fourth quarter earnings fell by more than half to $472m as agricultural and energy costs rose sharply. However, the results beat estimates and the shares rose 0.9 per cent to $37.94. .

Technology was among the weakest sectors after VMware, the virtualisation software firm, missed Wall Street's revenue target and its growth outlook disappointed. The shares plunged 33.9 per cent to $54.87.

House passes economic stimulus legislation

WASHINGTON (Reuters) - The U.S. House of Representatives on Tuesday overwhelmingly approved a plan to give the U.S. economy a $146 billion election-year boost through tax rebates and other measures to stave off a possible recession by boosting business and consumer spending.

The plan, which passed by a vote of 385-35 and is backed by President George W. Bush, includes tax rebates of up to $600 for individuals and $1,200 for married couples, plus $300 per child. The legislation also includes tax breaks to encourage business investment in new equipment.

It now goes to the Senate, where Senate Majority Leader Harry Reid said it would be taken up quickly. The Nevada Democrat said he expects a number of amendments to be offered to the bill. But backers of the House bill are concerned that demands in the Senate to spend more for roads and other programs will slow down the legislation.

Lawmakers are aiming to get a bill to Bush's desk by mid-month and any changes in the Senate would mean further negotiations with the House and the White House to work out their disagreements.

Senate Republican Leader Mitch McConnell of Kentucky said the Senate should approve the House-passed version to avoid delays.

"This is not a time to get into some kind of testing of wills between the two congressional bodies. This is a time to show that we can rise above partisanship, do something important, and do it quickly," McConnell said.

House Speaker Nancy Pelosi, a California Democrat, and House Republican Leader John Boehner of Ohio, also urged the Senate to accept the House-passed package that the two leaders negotiated with the White House.

Lawmakers are hoping the rebates and business incentives will spur consumer and corporate spending and keep the economy from dipping into a recession ahead of the November presidential and congressional elections. U.S. economic growth is expected to slow this year in the face of a downturn in the housing market, a subprime mortgage crisis, a tightening credit market and rising oil prices.

ALTERNATIVE OFFERED IN SENATE

The House plan would cost the federal treasury nearly $146 billion this year and almost $15 billion next year, according to the latest estimates by the Joint Tax Committee.

Senate Finance Committee Chairman Max Baucus, a Montana Democrat, has offered an alternative that would provide a flat $500 rebate to all eligible people, $1,000 for couples and $300 per child. Seniors with Social Security and other income of at least $3,000 would also be eligible for the rebates.

While most economists expect the U.S. economy to slow significantly this year, it is unclear whether a full-blown recession is in the offing.

Stronger-than-expected orders in December for U.S.-made durable goods, which include big-ticket items such as aircraft and appliances, suggested the economy may not be as bad as some had thought. The Commerce Department said new orders for the long-lasting goods rose 5.2 percent last month, well above the 1.5 percent increase forecast by economists in a Reuters poll.

The economic outlook could become clearer on Friday when the government releases the January employment report. In December the unemployment rate jumped to 5 percent, from 4.7 percent in November. Investors were unnerved by a scant 18,000 new jobs created in December. They are expecting that a modest 63,000 new jobs were created this month.

The Senate Finance Committee is set to consider its proposal on Wednesday. That plan, with an estimated cost of about $156 billion, would also extend unemployment insurance benefits and provide some additional business tax breaks. A proposed $500 per individual and $1,000 per couple rebate in the Senate package would go to all tax filers who report at least $3,000 in income for 2007. Seniors with Social Security income also would be eligible for the rebate.

Under the House-passed measure, low-income individuals who did not earn enough to pay income taxes would get a $300 rebate, plus the child credit.

The House proposal would phase out rebates for individuals earning more than $75,000 in taxable income and for married couples earning more than $150,000. The Senate proposal has no income caps.

Oil futures rise on Fed, OPEC views

NEW YORK - Oil futures ended an erratic session higher Tuesday as investors focused on expectations that the Federal Reserve will cut interest rates and OPEC will hold production steady, and shrugged off estimates that domestic crude inventories rose last week.

Energy investors hope that stimulus efforts by the Fed and Congress will limit the damage from a slowing economy. The Fed cut interest rates sharply last week, and is expected to cut rates again on Wednesday.

"Traders are trying to gauge the success of interest rate cuts and fiscal stimuli whose effects cannot really be known for weeks or months," said Peter Beutel, president of the energy risk management firm Cameron Hanover, in a research note.

Traders were also mulling OPEC production levels. Organization of Petroleum Exporting Countries output rose by 100,000 barrels a day in January to 32.9 million barrels a day, Dow Jones Newswires reported. But OPEC ministers are expected to hold future production steady at a meeting on Friday.

"It looks as if there's not going to be any action out of OPEC," said Andrew Lebow, senior vice president of MF Global Inc. in New York.

Light, sweet crude for March delivery rose 65 cents to settle at $91.64 a barrel on the New York Mercantile Exchange after falling as low as $90.33 earlier. It was oil's first close above $91 in two weeks, but prices alternated frequently between gains and losses Tuesday.

Uncertainty about the economy remains the dominant driver of the energy market, analysts said.

"There's underlying anxiety about our economy," Lebow said.

Crude prices will be tested Wednesday when the Energy Department's Energy Information Administration issues its weekly inventory report. Oil inventories likely rose last week for the third straight time, according to analysts surveyed by Dow Jones Newswires.

At the pump, meanwhile, gas prices fell 0.3 cent Tuesday to a national average of $2.978, according to AAA and the Oil Price Information Service. Gas prices have mostly fallen lately as oil has retreated from record prices and consumer demand has been tepid.

Other energy futures were mixed Tuesday. February heating oil futures rose 1.53 cents to settle at $2.5418 a gallon on the Nymex while February gasoline futures rose 0.42 cent to settle at $2.3295 a gallon. Petroleum product prices were pushed higher by word Valero Energy Corp. will cut production at a Texas refinery by 100,000 barrels a day during maintenance that will begin next month and last 75 days, Dow Jones reported.

February natural gas futures fell 9.9 cents to settle at $7.996 per 1,000 cubic feet.

In London, March Brent crude rose 62 cents to settle at $92 a barrel on the ICE Futures exchange.

IMF sees slowing world economy in 2008

WASHINGTON - World economic growth will slow significantly in 2008 but the U.S., whose housing downturn is rattling global financial markets, will avoid recession, the International Monetary Fund forecast Tuesday.

The stimulus package being hashed out between Congress and the White House, along with the Federal Reserve's recent cut of a key interest rate, should provide a modest boost to U.S. economic growth by the middle of the year, IMF officials said.

"The five-year long global expansion has begun to moderate in response to the spreading effects of financial disruptions," Simon Johnson, economic counselor and director of the research department at the IMF, said during a press briefing.

The IMF sees world economic growth slowing to 4.1 percent this year, down from 4.9 percent in 2007. U.S. economic growth will slow to 1.5 percent in 2008, Johnson said, down from an estimated growth rate of 2.2 percent in 2007. The 2008 projection is lower than the IMF's October 2007 prediction of 1.9 percent.

Rising home foreclosures and falling home prices caused U.S. financial markets to drop steeply in recent months, as major banks such as Citigroup Inc. and Merrill Lynch & Co. Inc. have written down billions of dollars of securities that include bad home loans.

The disruptions have reverberated around the world as banks have cut back on lending and raised credit standards, leading to tighter credit markets.

Tuesday's IMF report was the second time the organization has cut its 2008 growth projection. Last July, the IMF estimated the world economy would grow 5.2 percent in 2008, but in October the estimate was reduced to 4.4 percent.

Johnson said that difficulties in the U.S. financial sector have impacted Europe's economy. Several of its major banks have also reduced the value of complex securities they hold that are tied to U.S. mortgages.

The IMF expects growth in the European Union to slow to 1.6 percent this year, down from an estimated 2.6 percent in 2007.

Asia and Latin America, meanwhile, will also see reduced growth in 2008, the IMF said, as their exports decline due to weaker economies in the United States and Europe.

The global impact of the U.S. slowdown indicates that the U.S. economy still exerts influence over the rest of the world, despite predictions that other countries are "decoupling," Johnson said.

Equities markets in the United States, Europe, and Asia fell steeply last week on fears the U.S. economy would slip into recession.

"Reports of decoupling have been greatly exaggerated," Johnson said.

China is forecast to continue its rapid growth, though at a reduced pace, with growth slowing from 11.4 percent in 2007 to 10 percent this year, the IMF said.

Africa, meanwhile, will grow more quickly in 2008, thanks to rising commodity prices and improved economic policies, Johnson said. Africa's economies will grow by 7 percent in 2008, up from 6 percent last year, the IMF projected.

The estimates were included in an update of the IMF's World Economic Outlook, which is issued twice a year. The next update will be issued in April.

Durable goods orders rise by 5.2 percent

NEW YORK - Orders to factories for big-ticket manufactured goods jumped unexpectedly in December, good news amid signs that the U.S. economy may be tipping toward a recession.

Still, analysts said the 5.2 percent growth in orders — while potentially boosting industrial output in coming months — likely came from overseas demand and that domestic growth faced continuing threats from tight credit and mortgage markets that have forced consumers to retrench.

The Conference Board report Tuesday that consumer confidence fell sharply in January on worries over deteriorating business conditions and a weakening job market gave another sign of consumer angst.

The New York-based business research group said that its Consumer Confidence Index dropped to 87.9 in January from a revised 90.6 in December. That put it back to about where it was in November, when it registered 87.8. The January reading was just a tad below the 88 expected by Wall Street analysts, according to Thomson/IFR.

Meanwhile, a key index that tracks home prices plunged a record 8.4 percent in November.

The drop in the Standard & Poor's/Case-Shiller 10-city composite home price index was the 11th straight monthly decline and the biggest year-to-year drop since a 6.7 percent decrease in October.

While acknowledging that the factory orders report was a positive sign, economists worried that it would be misinterpreted as signaling greater strength than exists.

"So make no mistake: The U.S. economy remains under severe stress," said Bernard Baumohl, managing director of the Economic Outlook Group, in a research note. "When you have more than 70 percent of the economy (consumers) in retrenchment mode and a banking sector shutting down the lending window, the prospects of a recession are still very real."

David Huether, chief economist of the National Association of Manufacturers, also welcomed the orders report as "confirmation for manufacturers that export-led growth is continuing." But he worried that the downturn in housing would hurt the economy.

"This is why immediate action from Capitol Hill on an economic stimulus package is needed to encourage both consumer spending and business investment," Huether said.

The White House and Congress last Thursday announced a joint agreement to work on an economic stimulus program that's expected to include tax rebates for consumers.

That came two days after the Federal Reserve on Jan. 22 cut its short-term interest rate target three-quarters of a percentage point to 3.5 percent to boost the economy.

Fed policy makers began a two-day meeting on Tuesday, and many analysts and investors expect an additional rate cut of at least a quarter of a point.

In an ongoing effort to provide relief to cash-strapped financial institutions, the Fed said Tuesday it had auctioned an additional $30 billion to commercial banks at an interest rate of 3.123 percent.

Through the Fed's four auctions since December, a total of $100 billion in short-term loans has been made available to banks.

The market marked time in advance of the Fed's Wednesday announcement. The Dow Jones industrial average rose 36.83, or 0.3 percent, to 12,420.72 in afternoon trading. The Standard & Poor's 500 index rose 1.88, or 0.1 percent, to 1,355.84, while the Nasdaq composite dropped 8.45, or 0.4 percent, to 2,341.46.

Lynn Franco, director of The Conference Board Consumer Research Center, said in a statement that the consumer confidence survey — which is based on a sample of 5,000 U.S. households — indicated that consumers in January appeared more pessimistic about the economy.

"Looking ahead, consumers are quite downbeat about the short-term future, and a greater proportion expect business conditions and employment to deteriorate further in the months ahead," she said. That could affect spending decisions, she added.

It was unclear how much to read into the data because the survey was taken before the Fed's big rate cut and the announcement of the stimulus program, both aimed at boosting consumer spending.

The strength in durable goods orders — double what analysts had expected — came from a big increase in demand for commercial aircraft. But even excluding the transportation sector, orders posted a solid 2.6 percent gain.

Despite the strong December, it was a lackluster year. Orders for all of 2007 rose just 0.97 percent following much bigger increases of 6.31 percent in 2006 and 9.45 percent in 2005. It was the poorest showing since orders actually fell by 3.17 percent in 2002, a year when the country was still struggling to emerge from the 2001 recession.

Wall St rises on earnings and economic data

US stocks advanced again on Tuesday as some better-than-expected corporate earnings and a surprising jump in durable goods orders helped boost beaten-down sentiment on Wall Street.

However, as the Federal Reserve Open Market Committee convened for its two-day meeting there was some more worrying news for the US consumer as house prices slumped by a record amount and consumer confidence took another knock.

Traders found strength in telecoms, materials and utilities stocks but retailers and some technology companies were sold as skittish investors awaited the Fed's decision on interest rates due on Wednesday.

At midday the S&P 500 was up 0.5 per cent at 1,361.71, the Dow Jones Industrial Average gained 0.7 per cent to 12,464.45 while the Nasdaq Composite climbed only 0.2 per cent to 2,353.35.

Many analysts remain cautious on the near term outlook for stocks with volatility remaining elevated amid fears of a US recession, further write-downs in the financial sector and continued uncertainty surrounding bond insurers.

"We are still to be convinced that the strategic case for equities has improved sufficiently," said David Shairp, global strategist at JPMorgan Asset Management. In order to make a stronger case Mr Shairp said the market needs to see that "central banks ease, the banking system recapitalises itself, equity valuations are compelling and technical indicators are supportive."

But others have pointed to signs of improvement in the equities environment in recent trading with the S&P avoiding late-session sell-offs in three of the last four trading days.

"The market has shown a little bit of stability over the last few sessions," Richard Sparks, senior equities analyst at Schaeffer's Investment Research, said. "The Fed holds a big wild card - they have the power to make or break the market."

In spite of enacting an unprecedented 75bp cut last week, the Fed is expected to continue easing rates today with the futures market pricing in a 74 per cent likelihood of a 50bp cut. Traders have warned that any deviation from this line could spark another sell-off in equity markets.

Tuesday's economic news was dominated by a larger-than-expected rise in durable goods orders, which provided solace to investors fearing a manufacturing slump. Orders for big ticket items rose 5.2 per cent in December, well above a forecast gain of 2.1 per cent.

Among Dow components benefiting from the improved outlook were Boeing (NYSE:BA), up 2.5 per cent at $79.50 and Caterpillar (NYSE:CAT), up 1.8 per cent at $69.42.

""There is no doubting the strength of the December data, but there is plenty of doubting how sustainable this is, and what this says about future trends," Alan Ruskin, chief international strategist at RBS Greenwich Capital, said.

There was little sign of optimism for US consumers after the S&P/Case-Shiller 10-city home price Index fell a record 8.4 per cent in the year through November, an 11th straight monthly decline. Meanwhile the latest reading of the Conference Board's U.S. consumer confidence index fell to 87.9 in January from an upwardly revised 90.6 in December.

Earnings news was more upbeat, with 20 of 26 S&P 500 companies reporting results on Tuesday beating estimates.

One of the exceptions was Countrywide Financial (NYSE:CFC) which posted a wider-than-expected $422m loss after the mortgage lender set aside $924m to cover rising loan losses. In spite of the loss the beaten down shares rose 4.2 per cent to $6.20 after its chief executive said a takeover by Bank of America was a "go".

Also in the financial sector, American Express (NYSE:AXP), up 1.1 per cent to $47.94, posted a 10 per cent decline in net income as it set aside $438m charge to cover bad loans.

In industrials Dow Chemical (NYSE:DOW) said fourth quarter earnings fell by more than half to $472m as agricultural and energy costs rose sharply. However, the results beat estimates and the shares rose 2.3 per cent to $38.45. Meanwhile,3M (NYSE:MMM)'s adjusted profit also exceeded Wall Street's expectations and the shares added 0.8 per cent to $78.05.

Technology was among the weakest sectors on Tuesday after VMWare, the virtualization software firm, missed Wall Street's revenue target causing the shares to plunge 30.7 per cent to $57.54. However,Lexmark (NYSE:LXK) cheered investors with its fiscal first quarter outlook and the printer maker's shares shot up 14.3 per cent to $33.53. Yahoo fell 1 per cent to $20.57 ahead of its quarterly results, due after the closing bell.

Clear Channel Communications (NYSE:CCU), the radio station operator, continued to fall amid fears a buyout deal could fall apart. The shares gave up 4.6 per cent to $29.97 and have fallen 11.3 per cent in the last two sessions.

Durable goods orders jump, house prices slump

NEW YORK (Reuters) - Stronger-than-expected orders for U.S.-made durable goods in December suggested the economy retained some life and might not need a heavy dose of interest-rate cuts, even though house prices fell a record amount in November.

New orders for long-lasting goods rose 5.2 percent last month, a Commerce Department report showed on Tuesday, well above the 1.5 percent increase forecast by economists in a Reuters poll.

The surprise surge in durable goods orders helped offset a report that showed home prices in 10 major metropolitan areas fell a record 8.4 percent in the year through November.

U.S. Treasuries fell after the durables report, which contradicted weakness in other areas of the economy and undermined the argument for more aggressive interest rate cuts by the Federal Reserve. Stocks rose.

A consumer sentiment survey, meanwhile, showed confidence fell in January but by slightly less than economists had expected. The Conference Board's index of consumer sentiment fell to 87.9 from an upwardly revised 90.6 in December.

"Consumers are on the edge but haven't packed it in yet. They are worried about the up-and-down stock market, falling house value and high gasoline prices. But they still have jobs," said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania.

On Friday, the U.S. Labor Department reports January jobs data. Economists forecast 63,000 new jobs will be created and the unemployment rate will remain unchanged at 5.0 percent.

FED MEETS

The Fed, which begins a two-day monetary policy meeting later on Tuesday, is expected to lower interest rates on Wednesday in an effort to bolster the economy suffering from a credit crunch, falling home values and rising prices that threaten to send the economy into recession.

Short-term interest rate futures have put the chances of a 50-basis-point cut in rates by the Fed at 70 percent with the chances for a 25-basis point rate cut at 30 percent.

The Fed already has cut its benchmark rate 175 basis points since mid-September to 3.5 percent.

The increase in durable goods orders, products meant to last three or more years, was driven by the largest rise in machinery orders since December 2006. But the report is notoriously volatile.

"We are witnessing the positive impact of the cheap U.S. dollar on the economy, and the reason we only believe the economy will flirt with recession rather than falling into a full-fledged one," said T.J. Marta, fixed income strategist at the RBC Capital Markets in New York.

On the negative side was the sharp drop in home prices reported by Standard & Poor's/Case-Shiller Home Price Index.

Home prices in 10 major metropolitan areas have now declined for 11 consecutive months and show little sign of bottoming, Robert Shiller, a founder of the index and chief economist at MacroMarkets LLC, said in a statement.

"We reached another grim milestone in the housing market in November," Shiller said.

Falling U.S. home prices in the past year have fueled rising delinquencies and foreclosures as homeowners are unable to get out of costly loans.

The housing market's troubles have prompted lawmakers in Washington to rally with bipartisan support for an economic stimulus plan of $150 billion.

With the specter of recession supplanting the Iraq war as the top U.S. concern, U.S. President George W. Bush acknowledged in his final State of the Union address on Monday that growth was slowing but insisted the country's long-term economic fundamentals were sound.

"In the long run, Americans can be confident about our economic growth. But in the short run, we can all see that growth is slowing," Bush said in a globally televised speech to the U.S. Congress.

The impetus for compromise is that no one, least of all an unpopular president nearing the end of his watch, wants to be blamed for an economic meltdown before the November 4 elections.

Rate cut hope lifts Wall Street

NEW YORK (Reuters) - Stocks rose on Tuesday as expectations the Federal Reserve will slash interest rates for the second time in a week boosted banks, insurers and home builders.

Investors snapped up shares of JPMorgan Chase and Wells Fargo on a bet lower interest rates will boost their profits and shore up the economy. Shares of insurer American International Group gained more than 3 percent.

Home builder shares surged, with Pulte Homes up more than 7 percent, on hopes lower rates will also revive the moribund housing market.

Fresh economic data showing an unexpected jump in orders for long-lasting manufactured goods offered another reason to be hopeful about the health of the economy. Plane maker Boeing Co. led the Dow's climb.

The Fed's policy-setters are widely expected to cut interest rates again on Wednesday, a week after they slashed rates by three-quarters of a percentage point in an emergency step to ward off a recession.

"The Fed is still going to do a 50 basis points rate cut," said Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut. "I don't think they're going to run the risk of disappointing what they believe are very fragile credit markets."

The Dow Jones industrial average gained 96.41 points, or 0.78 percent, to 12,480.30. The Standard & Poor's 500 Index climbed 8.33 points, or 0.62 percent, to 1,362.30. The Nasdaq Composite Index finished up 8.15 points, or 0.35 percent, at 2,358.06.

BANKS RALLY

Shares of JPMorgan, the No. 3 U.S. bank, finished up 4.1 percent at $47.45 on the New York Stock Exchange, while those of Wells Fargo, the nation's fifth-largest bank and second-largest mortgage lender, ended up 2.5 percent at $32.60.

Shares of AIG ended among the Dow's and the S&P 500's top advancers, up 3.9 percent at $56.73. Shares of Bank of America Corp, the largest U.S. bank by market value, gained 1.8 percent to $41.94.

The S&P financial index closed up 1.4 percent.

Shares of Pulte Homes, the No. 3 U.S. home builder, finished up 7.8 percent at $14.85 on the NYSE, while those of WCI Communities Inc, which builds luxury homes mostly in Florida, jumped 8 percent to $4.86.

The Dow Jones home construction index closed up 3.7 percent.

Shares of big manufacturers rose following the report on durable goods orders. Boeing led the Dow's climb with a gain of 4.3 percent to end at $80.96.

"The underpinnings of the economy got a little bit better picture today from the durable goods number... it takes a little bit of steam out of recessionary calls," said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles.

Shares of iPod maker Apple Inc were the top advancer on the Nasdaq, ending up 1.2 percent at $131.54.

Tech sector gains, however, were kept in check by disappointing outlooks from technology companies including EMC Corp and caution ahead of quarterly results from Yahoo Inc.

After the bell, Yahoo, the Internet media company, reported a drop in quarterly profit and forecast 2008 revenue below Wall Street expectations. Its shares dropped nearly 7 percent from a Nasdaq close of $20.81.

Trading was moderate on the New York Stock Exchange, with about 1.56 billion shares changing hands, below last year's estimated daily average of roughly 1.9 billion, while on Nasdaq about 2.24 billion shares traded, above last year's daily average of 2.17 billion.

Advancing stocks outnumbered advancing ones by a ratio of about 9 to 5 on the NYSE and by 5 to 4 on Nasdaq.

Wall St gets boost from durable orders data

US stocks had a lacklustre start on Tuesday as some better-than-expected durable goods orders were offset by a record fall in US house prices and a sharp decline in consumer confidence.

Meanwhile the latest batch of corporate earnings offered a mixed outlook for the US economy as the Federal Reserve Open Market Committee convened for its two-day policy meeting.

Less than an hour after the opening bell the S&P500 was up 0.3 per cent at 1,358.57, the Dow Jones Industrial Average gained 0.4 per cent to 12,435.76 but the Nasdaq Composite fell 0.1 per cent to 2,346.54.

Many analysts remain cautious on the near term outlook for stocks with volatility elevated amid fears of a US recession, further write-downs in the financial sector and continued uncertainty surrounding bond insurers.

"We are still to be convinced that the strategic case for equities has improved sufficiently," said David Shairp, global strategist at JPMorgan Asset Management.

In order to make a strong case for the strategic rebuilding of risk, Mr Shairp says the market needs to see a resolution of the credit crunch and "global central banks ease, the banking system recapitalises itself, equity valuations are compelling and technical indicators are supportive."

But others have pointed to signs of improvement in the equities environment in recent trading with the S&P avoiding late-session sell-offs in three of the last four trading days.

"The market has shown a little bit of stability over the last few sessions," Richard Sparks, senior equities analyst at Schaeffer's Investment Research, said. "The Fed holds a big wild card - they have the power to make or break the market."

The Federal Open Market Committee meets on Tuesday with the futures market all but fully pricing in a 50bp cut when the meeting concludes on Wednesday.

In spite of enacting an unprecedented 75bp cut last week, the Fed is expected to continue in an easing pattern. Traders have warned that any deviation from this line could spark more selling pressure in equity markets.

"We are looking for 25 basis points on both the discount and Fed fund rates based on some sense of stability in stocks as well as credit conditions," said Tom di Galoma, head of Treasury trading at Jefferies & Co. "We think this will be followed up by at least two if not three cuts over the next two to three FOMC meetings."

Tuesday's economic news was dominated by a larger-than-expected rise in durable goods orders. Orders for big ticket items rose 5.2 per cent in December, well above a forecast gain of 2.1 per cent. Durables for November were revised up to 0.5 per cent from a prior estimate of a 0.1 per cent decline.

Excluding transportation orders, durables rose 2.6 per cent in December after a fall of 0.4 per cent in November. Orders for non-defence capital goods excluding aircraft, a measure of business spending on equipment, rose 4.4 per cent last month after falling 0.2 per cent in November.

"The durables orders data were far stronger than expected," said Alan Ruskin, chief international strategist at RBS Greenwich Capital. "There is no doubting the strength of the December data, but there is plenty of doubting how sustainable this is, and what this says about future trends

Other analysts were more upbeat. TJ Marta, fixed income strategist at RBC Capital Markets said: "We are witnessing the positive impact of the cheap US dollar on the economy, and the reason we only believe the economy will flirt with recession rather than falling into a full fledged one."

There was little sign of optimism in the housing market after the S&P/Case-Shiller 20-city home price Index fell a record 8.4 per cent in the year through November, much more than the 7.1 per cent decline forecast by economists.

Meanwhile the latest reading of the Conference Board's U.S. consumer confidence index fell to 87.9 in January from an upwardly revised 90.6 in December.

Earnings news was led by a wider-than-expected $422m loss at Countrywide Financial (NYSE:CFC), the mortgage lender being acquired by Bank of America. Countrywide set aside $924m to cover loan losses and took a $831m charge linked to securities backed by home equity loans. In spite of the loss the beaten down shares rose 5.4 per cent to $6.27.

Also in the financial sector, American Express (NYSE:AXP) posted a 10 per cent decline in net income after the closing bell on Monday as it set aside a previously announced $438m charge to cover bad loans.

AmEx's problems reinforced fears that credit delinquencies are spreading from subprime borrowers to more affluent consumers. The shares fell 1.4 per cent to $46.74.

In industrials Dow Chemical (NYSE:DOW) said fourth quarter earnings fell 52 per cent to $472m because of restructuring and a $1.7bn increase in materials and energy costs. However, the results beat estimates and the shares rose 4.5 per cent to $39.28.

Meanwhile, 3M (NYSE:MMM), the diversified manufacturer, reported a decline in earnings from the same period last year when results benefited from one-time gains. However, its adjusted profit beat Wall Street estimates as sales climbed 7 per cent. The shares slipped 0.5 per cent to $77.03.

Valero Energy (NYSE:VLO), up 9.7 per cent at $60.25, also posted a significant decline as the oil refiner's fourth quarter earnings dropped from $1.11bn to $567m amid tighter margins from gasoline production. However, its results also beat Wall Street forecasts.

Lexmark (NYSE:LXK), the printer maker, provided a welcome boost to sentiment in the technology sector after it fiscal first quarter outlook pleased investors. The shares shot up 8.2 per cent to $31.75.

Yahoo fell 3.2 per cent to $20.12 ahead of its quarterly results, due later on Tuesday.

In Europe, the FTSE Eurofirst 300 was higher by 1.3 per cent and in London the FTSE 100 was up 1 per cent.

In Asia, Japan's Nikkei 225 index rallied 3 per cent overnight, while stocks in Hong Kong rose 1 per cent

The yield on the policy sensitive two-year Treasury note was 6 basis points higher at 2.25 per cent, with the market pressured after much stronger-than-anticipated economic data.

The dollar was mixed against major currencies early in New York. In overnight trade the dollar put on 0.1 per cent against the euro to $1.4766 and 0.2 per cent to Y107.1300 against the yen but slipped 0.1 per cent against the pound to $1.9868.

US crude prices slipped 0.2 per cent to $91.25 early in New York, while gold spot prices shed 0.3 per cent to $930.40.

Fed holds fourth credit auction

WASHINGTON - The Federal Reserve, working to combat effects of a serious credit crisis, said Tuesday it had auctioned $30 billion in funds to commercial banks at an interest rate of 3.123 percent.

It marked the fourth in a series of innovative auctions the Fed began last month in an effort to provide cash-strapped banks with extra reserves. The Fed's hope is that the increased resources will keep banks lending and prevent a severe credit squeeze from pushing the country into a recession.

The latest auction results indicated that the Fed's program is having success. The 3.123 percent interest rate for the $30 billion in short-term loans marked the lowest rate of any of the four actions. The previous auction resulted in a rate of 3.95 percent and the first two saw rates at 4.65 percent and 4.67 percent.

Bids for the current auction were received on Monday. The sharp drop in rates had been expected. Analysts said it reflected the fact that the central bank cut a key interest rate last week by three-fourths of a percentage point, the biggest reduction in more than two decades.

That signaled that Federal Reserve Chairman Ben Bernanke and his colleagues intend to move aggressively in an effort to prevent a steep slide in housing and the severe credit crunch from pushing the country into a recession.

The Fed's rate cut last week represented the first emergency move between meetings since September 2001. Fed officials are meeting again Tuesday and Wednesday and financial markets are expecting that another rate cut, probably by a half-point, will be announced at the end of those discussions.

Bernanke has said that the current auction process will continue for as long as needed to make sure that banks have sufficient reserves. He said the auctions might become a permanent addition to the Fed's "tool box" of strategies it can employ when credit markets have seized up.

But he said before that occurs, the Fed would seek comments from the public on how the auctions should be designed so that they can be best used by financial institutions.

The Fed went to the auction process in December after it had had only limited success in encouraging banks to use its "discount window" where the Fed makes direct loans to commercial banks. Banks had been reluctant to use the discount window out of concern they would be perceived as having trouble raising money through other avenues.

The Fed on Friday will announce the schedule and amounts for upcoming auctions. The first two auctions in December made $20 billion in short-term loans available and the two January auctions each provided $30 billion in loans.

New-Home Sales on a Slippery Slope

The housing sector's slump appeared to worsen considerably in December. A report released on Jan. 28 shows U.S. new-home sales fell 4.7%, to a 0.604 million-unit annual rate in December, from a revised 0.634 million in November (from 0.647 million previously).

Declines were evident across three of the four regions, with only the Northeast managing an increase. Unsold inventories of homes rose to a 9.6 months supply, up from 9.4, to the highest level on record going back to the late 1980s. There were 495,000 homes for sale, vs. 502,000 in November.

And there was more bad news on the home price front. The median home price dropped to $219,200, vs. November's upwardly revised $245,900. This big drop, the largest since 1970, exceeded the usual seasonal pattern. The result was a hefty year-over-year median price decline of 10.4% that followed an unusual 2.4% year-over-year rise in the November figures.

Even Weaker Than Existing Figures

Overall, it is clear the downtrend in housing remains pervasive and sizable, with the biggest quarterly decline of this cycle occurring in the most recent quarter. The December new-home sales drop, following the downward revision in November, leaves in place an ongoing steep downtrend that will keep housing market fears in full force until at least the next monthly round of sales reports.

The Jan. 28 data were even weaker than the existing home sales figures for December released on Jan. 24, which showed a 2.2% drop to a 4.890 million-unit pace, and a median price undershoot to $208,400. Both sales declines followed the 2.6% drop in pending home sales in November that tend to lead sales by a month. The sales declines fell short of the big 14.2% December drop in housing starts and 8.1% drop in permits.

We will continue to expect a construction spending drop of 0.6% in December that would accompany the 1.1% drop in December construction hours worked.

Surprisingly Good Except for Housing

The housing data remain consistent with a 29% rate of contraction in residential construction in the fourth-quarter GDP report that would exceed the 20.5% third-quarter pace of decline.

Yet even in the fourth quarter, the economy, excluding the housing sector, performed surprisingly well, as "ex-housing" GDP will have posted a 2.4% fourth-quarter growth clip if our estimated 1% GDP gain for the period is actualized. This follows ex-housing GDP growth rates of 6.2% in the third quarter, and 4.6% in the second.

Although the declines in the housing market are dramatic, it remains the case that this sector on its own is too small to pull down overall GDP substantially via the direct effect of reduced residential construction. If we are going to see the proverbial "pass-through" of the sector's weakness into the broader economy, it will likely be spurred by the effects of credit market turmoil or the wealth effect associated with falling prices.

Asian stocks slide as global market rally fades

TOKYO (AFP) - Asian share prices were hammered Monday as a global stock market rally fizzled out amid renewed pessimism about the US economic outlook and a plunge in Chinese stocks, dealers said.

They said that investors fled to safe havens such as bonds and gold as markets around the region slumped deep into the red in the wake of losses on Wall Street, with Shanghai plunging by about 7.2 percent.

 

Hong Kong was down almost 6.0 percent in afternoon trade and Singapore tumbled by about 5.0 percent. Tokyo ended down nearly 4.0 percent as Seoul lost 3.85 percent. Indian share prices slid about 4.6 percent in morning deals.

In Europe, investors were bracing for another wild ride when trading resumed.

Sentiment remained fragile in the wake of last week's rollercoaster performance that saw global shares slump on fears of a US recession before rebounding sharply following a hefty US interest rate cut and an economic stimulus plan.

"The market is fluctuating wildly," said Francis Lun, general manager at Fulbright Securities in Hong Kong.

"Investors don't have the appetite to buy stocks now."

Chinese share prices were hit by worries about the US economy and severe winter weather at home.

After last week's emergency US interest rate cut, many investors are hoping that the Federal Reserve will deliver another dose of monetary medicine at the end of a two-day meeting on Wednesday.

The fear is that stocks could resume their decline if the Fed fails to deliver the quarter-point reduction many traders are betting on.

Market views are also mixed about whether the central bank's efforts will be enough to prevent the US economy from slipping into recession.

"If the Fed makes another rate cut, the market will be likely to take the decision positively," said Mizuho Research Institute senior analyst Koji Takeuchi.

"But the market may turn cautious, as there are expectations that the forthcoming data may revive concerns about the US economy," said Takeuchi.

US President George W. Bush was scheduled to deliver his annual State of the Union address later Monday, while key US jobs data due Friday will be keenly awaited for fresh clues on the health of the world's largest economy.

"Many investors are taking a wait-and-see attitude ahead of a series of events this week," said Won Jong-Hyuck, an analyst at SK Securities in Seoul.

"All eyes will be on whether the upcoming US job market data will meet the consensus or not, given that the December data were a key culprit in the heightened volatility in global financial markets."

US figures due this week will provide snapshots on existing home sales, consumer confidence, auto sales and the job market, among other surveys.

"The volatile market is expected to persist until the big economic events are played out. But the market may now be in the process of establishing a near term bottom," said Mitsushige Akino, chief fund manager at Ichiyoshi Management in Tokyo.

In New York, the blue-chip Dow Jones Industrial Average slipped 1.38 percent Friday to close at 12,207.17, capping a tumultuous week.

World oil prices fell in Asian trade Monday as market players remained wary about prospects for the global economy, with New York's light sweet crude for delivery in March down 90 cents at 89.81 dollars per barrel.

On the foreign exchange market, the dollar was mixed as investors waited for the Fed meeting and Bush's State of the Union address, dealers said.