Stock markets rally on hopes for new bailout plan

[Ron Burgundy]

Global stocks rallied on Wednesday amid hopes that the US Senate will soon approve a revised 700-billion-dollar Wall Street bailout seen as vital to preventing the collapse of more financial giants.

The expected vote, which comes after the House of Representatives killed the original package, follows pleas from President George W. Bush for quick action before the US economy slumps into a disastrous recession.

In a bid to build Republican backing for the bailout in the House, the Senate bill will include measures that extend tax cuts set to expire and an expansion of federal insurance for bank deposits.

Stocks rose in Asia and Europe following a powerful rally on Wall Street as hopes grew that the package could clear Congress in the coming days.

Tokyo ended up 0.96 percent as Sydney soared 4.2 percent. European markets followed suit, with London rising 1.15 percent at the open as Frankfurt gained 0.43 percent and Paris advanced 0.26 percent.

CMC Markets senior dealer Dominic Vaughan in Sydney described the rebound as a "corrective bounce".

Dealers said the chorus of concern following US lawmakers' rejection of the Treasury's proposed bank bailout had raised hopes that a new package can be approved before the crisis spirals out of control.

"Senate Democrats and Republicans believe it is essential that we work quickly on this important legislation to restore confidence to our financial system and strengthen the economy," said Senate Majority leader Harry Reid.

Wall Street's Dow Jones Industrial Average leapt 485.21 points (4.68 percent) to close at 10,850.66 Tuesday.

Wednesday's vote means the Senate will, unusually for a finance bill, consider the bailout before the House finalises the measure.

The package is expected to have a much easier path through the 100-member chamber than it had in the House, where in a shock vote, members rejected it on Monday by 228 votes to 205.

"There are expectations that lawmakers will pass a bailout bill by midweek or the government will come up with a new plan," said Kazuhiro Takahashi, equity manager at Daiwa Securities SMBC. "But the markets have not fully recovered amid lingering caution."

The Bank of Japan announced just before the opening bell that the nation's business confidence had fallen to the lowest level in five years in September as Asia's largest economy skirts recession.

The central bank pumped emergency funds into the short-term money market for an 11th straight business day to try to ease strains on the financial system, making two injections of 800 billion yen.

The fear is that if credit flows -- the lifeblood of the global economy -- dry up, then a worldwide recession may follow.

"Unless bank funding pressures ease significantly and soon, then global growth expectations will continue to worsen," warned NAB Capital economist John Kyriakopoulos in Sydney.

In New Zealand, where shares closed up 3.16 percent, the central bank chief reassured jittery investors that the country's banking system remained solid amid the chaos in the United States.

"The banking system is sound in New Zealand, and we do not expect this to alter," Reserve Bank of New Zealand governor Alan Bollard said in a statement.

Luxembourg's Prime Minister Jean-Claude Juncker insisted that there was "no threat" to Europe's banking system despite a series of government bailouts.

On the foreign exchange market, the dollar fell back against the yen in erratic Asian trade as market players locked in profits ahead of the US Senate vote.

The dollar sank to 105.95 yen in Tokyo afternoon trade from 106.11 in New York late Tuesday. The euro firmed to 1.4107 dollars from 1.4092.

source: AFP - http://news.yahoo.com/s/afp/20081001/ts_afp/usfinancebanking [link]