Last week’s stock sell-off gave way to a big rally on Monday as countries around the world took steps to ease the financial crisis, ushering in a drastic reshaping of the banking industry even as doubts lingered about its long-term effects.
The Dow Jones industrial average opened 400 points higher and headed north, led by big gains in financial stocks. In the last half-hour of trading, the blue-chip index was up more than 760 points or 9.1 points.
The broader Standard & Poor’s 500-stock index surged 9.1 percent and the Nasdaq was up about the same. Stocks in Paris and Frankfurt had their biggest one-day gains ever.
The rallies came after central banks flooded the financial system with billions of dollars in liquidity, throwing out the traditional financial playbook in favor of a series of moves that officials hoped would get banks lending again.
European countries — including Britain, France, Germany and Spain — announced aggressive plans to guarantee loans, take ownership stakes in banks or prop up ailing companies with billions in taxpayer funds. In Washington, Henry M. Paulson Jr., the Treasury secretary, is planning to meet this afternoon with Wall Street chief executives to hash out the terms of a new round of government intervention. Washington has also announced plans to take equity stakes in banks to get them lending again.
Monday morning also brought word that a financing deal for Morgan Stanley, the embattled investment bank, had finally gone through, a closely watched event that had become a gauge of confidence in the markets. Shares of Morgan Stanley rose more than 60 percent.
Despite the moves, some doubts remained about whether investors would be able to shake off the fears unleashed by last week’s enormous sell-off, the worst on Wall Street since 1933.
The ultimate judgment on this weekend’s developments may have to wait until Tuesday, when credit markets reopen after the Columbus Day holiday. Problems in the flow of credit are at the root of the current crisis; if these markets remained locked on Tuesday, stocks could fall once again.
Some investors said on Monday that stock investors may be holding off to see how the credit markets react. Still, they said that the 500-point gains in the Dow were too impressive to ignore.
"In this process you’re going to have up days, with five-plus percentage swings, and you’re going to see down days, five-plus percentage swings," said Ryan Larson, head equity trader at Voyageur Asset Management in Chicago. "The key thing to take away from this is the key pieces of this puzzle, of this fix, are beginning to appear."
The rally was even bigger in European markets, where the German DAX index and CAC 40 in Paris both finished up more than 11 percent, their biggest single-days gains ever. The FTSE-100 in London rose 8.3 percent.
In additional moves meant to restore confidence, Neel T. Kashkari, an assistant Treasury secretary who was recently put in charge of the government’s plan for tackling the crisis, appeared in Washington on Monday morning to offer investors their first glimpse at the plan’s inner workings. And the Fed said it would make billions of dollars available to banks via swap lines with the Bank of England, the European Central Bank and the Swiss National Bank.
Oil prices closed higher by $3.17 a barrel, to $80.84, in New York trading. The bond market was closed Monday.
Some analysts said they still have their doubts. "It’s going to take actions more than words at this time, given the extreme distress that the money markets are in and the extreme distress that the equity markets were in," said Douglas M. Peta, a market strategist at J.& W. Seligman & Company.
In Hong Kong, the Hang Seng index bounced 9.6 percent higher. The S.&P./ASX 200 index in Sydney closed up 5.6 percent. Tokyo markets, which lost about a quarter of their value last week, were closed Monday for a national holiday.
In Moscow trading, the Micex index rose 4.5 percent.
"We’re extremely cautious," Philippe Gijsels, senior equity strategist at Fortis Global Markets in Brussels, said. "This looks like the start of a typical bear-market rally." He said measures that Group of 7 countries announced over the weekend had helped banking stocks, but that the market had been due for a rally after major indexes posted some of their worst declines last week.
"To repair the market will take some time," he said. "The problem is that the financial problem has now become a real economic problem. The damage has been done."
Meeting in Paris over the weekend, European financial and political leaders agreed to a plan that would inject billions of euros into their banks in a bid to restore confidence to the teetering financial system.
Taking their cue from a rescue plan announced last week by Britain, the European countries led by Germany and France pledged to take equity stakes in distressed banks and vowed to guarantee bank lending for periods up to five years. Spain and Italy also announced bailout plans.
The Bank of Japan, it said, will consider the introduction of similar measures.
