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US stocks staged the biggest two-day rally in five years, led by financial shares, after Federal Reserve vice-chairman Donald Kohn buttressed expectations for another interest rate cut.
Citigroup, Lehman Brothers, Morgan Stanley and Goldman Sachs rose more than 5 per cent as banks and brokerages in the Standard & Poor's 500 Index gained the most since 2002.
EBay and Amazon.com helped push the Nasdaq Composite Index to a 3.2 per cent gain after Sanford C. Bernstein forecast a "strong" fourth quarter for both.
"Kohn's comments just add to a perception that the Fed is embarking on a sustained path of easing," said Michael Metz, the New York-based chief investment strategist at Oppenheimer Holdings, which manages US$60 billion ($77.7 billion). "There's also huge relief that the worst of the financial crisis may be behind us."
The Standard & Poor's 500 Index added 40.79 points, or 2.9 per cent, to 1469.02, bringing its two-day gain to 4.4 per cent, the most since October 2002.
The Dow Jones Industrial Average increased 331.01 points, or 2.6 per cent, to 13,289.45, its best daily advance since April 2003. The Nasdaq Composite gained 82.11 points to 2662.91.
More than 13 stocks rose for every one that fell on the New York Stock Exchange.
European shares also climbed, with the Dow Jones Stoxx 600 gaining 2.8 per cent to 364.09, the most since 2003. Stocks rallied after Kohn said market "turbulence" may reduce credit to businesses and consumers, suggesting he sees higher risks to economic growth than a month ago.
The third straight monthly decline in orders for US durable goods added to speculation the Fed will cut rates to spur the economy.
Traders boosted wagers that the Fed will cut its benchmark lending rate when it meets on December 11. Odds of a half-point cut rose to 8 per cent from 2 per cent, while the likelihood of a reduction of any size remained 100 per cent.
"If the Fed can be easy enough to keep us out of recession, the market will be higher one year forward," said Philip Orlando, chief equity market strategist at Federated Investors. The firm manages US$44 billion of stocks.
US stocks extended an advance spurred on Tuesday when Citigroup received a US$7.5 billion cash infusion and JPMorgan said Intel would benefit from "robust" computer demand. The S&P 500 hasn't risen two days in a row since October 29.
The S&P 500 Financials Index dropped as much as 16 per cent this month on concern that credit market losses will sap profit growth.
The gauge on November 26 traded at 10.6 times earnings, the lowest since at least 1995, Bloomberg data show.
- Bloomberg
