A move by the world's central banks to lower the cost of borrowing exhilarated investors Wednesday, sending the Dow Jones Industrial Average soaring almost 500 points and easing fears of a global credit crisis similar to the one that followed the 2008 collapse of Lehman Brothers.
Big U.S. banks were among the top gainers, jumping as much as 7 percent.
Markets in Europe surged, too, with Germany's DAX index climbing 5 percent.
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The Dow Jones Industrial Average surged 490.05 points, or 4.2 percent, to close at 12,045.68. Over the past three days the Dow has gained back all of the 564-point loss it had over Thanksgiving week. The Dow has more than gained back the 564-point slump it had last week and is up 7 percent so far this week. The last time it closed up more than 400 points was Aug. 11.
The Standard & Poor's 500 Index gained 51.77 points, or 4.3 percent, to 1,246.96.
The Nasdaq Composite Index gained 104.83 points, or 4.2 percent, to 2,620.34.
"The central banks of the world have resolved that there will not be a liquidity shortage," said David Kotok, chairman and chief investment officer of Cumberland Advisors. "And they have learned their lessons from 2008. They don't want to take small steps and do anything incrementally, but make a big bold move that is credible."
Wednesday's action by the banks of Europe, the U.S., Britain, Canada, Japan and Switzerland represented an extraordinary coordinated effort.
But amid the market's excitement, many doubts loomed. Some analysts cautioned that the banks' move did nothing to provide a permanent fix to the problems facing heavily indebted European nations such as Italy and Greece. It only buys time for political leaders.
"It is a short-term solution," said Jack Ablin, chief investment officer at Harris Private Bank. "The bottom line on any central bank action is that it papers over the problems, buys time and in some respects takes pressure from politicians. ... If nothing's done in a week, this market gain will disappear."
The rally was broad; only a handful of stocks in the S&P 500 declined. Big U.S. banks led the gains. JPMorgan Chase & Co. jumped 7.7 percent, the most of the 30 Dow components. Morgan Stanley rose 10 percent and Citigroup Inc. 8.2 percent.
Surging commodity prices lifted the stocks of companies that make basic materials such as steel. United States Steel Corp. gained 14 percent, the most in the S&P 500. AK Steel Holding Corp. added 11 percent. Energy stocks also leaped. Alpha Natural Resources Inc. rose 14 percent, Peabody Energy Corp. 13 percent.
European banks hold large amounts of European government debt and would have the most to lose in the event of a default in Europe, something investors around the world have been increasingly fearful of.
Those worries — and the reluctance of the European Central Bank to intervene — have caused borrowing rates for European nations to skyrocket. Wednesday's decision greatly alleviated fears by cutting short-term borrowing rates to banks, giving them much easier access to money. But borrowing costs remain extremely high for indebted countries such as Italy and Spain.
The euro rose sharply, while U.S. Treasury prices fell as demand weakened for ultra-safe assets.
The move by the banks takes some pressure off the financial system, which has signaled in recent days that banks were losing faith in their trading partners. Banks need dollars to fund their daily operations, and they need to trust each other to maintain healthy flows of credit. Access to dollars has dried up as American money market funds reduced their lending to European banks.
But the banks' most recent steps do little to solve the long-term debt problem in Europe.
"People are taking comfort that it's globally coordinated," said Peter Tchir, who runs the hedge fund TF Market Advisors. "In itself, it does nothing. But the bulls are anticipating that this is just the beginning of central bank and other actions" to ease market pressures.
Any successful plan would have to reduce borrowing costs for Italy and other indebted nations, Tchir said. Italy's borrowing costs edged lower Wednesday, but the nation was still paying more than 7 percent interest for 10-year borrowing — a dangerously high level.
European finance ministers in Brussels have been meeting since Tuesday but have failed to deliver a clearer sense of how the currency union will proceed. More leaders gather next week for a summit.
In another attempt to free up cash for lending, China on Wednesday reduced the amount of money its banks are required to hold in reserve. It was the first easing of monetary policy in three years, and analysts are expecting more.
Growth in China, which has the largest economy after the European Union and the U.S., could be crucial to sustaining any recovery after the debt crisis.
A string of positive U.S. economic news also propelled the market higher. An index measuring manufacturing in the Midwest surged to a seven-month high; private company hiring jumped in November to the highest level this year, according to payroll company ADP; and the number of contracts to buy homes jumped in October to the highest level in a year.
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