Dow soars 936 points as global banking rescue plans announced

PLANS by governments across the world to support the global banking system appeared to pay early dividends and reassure distraught investors yesterday.

Wall Street followed the lead set by the FTSE in London – which rose 8.26 per cent to close at 4,256.9, wiping out the losses suffered in last Friday's falls. The Dow Jones industrial average rose 936.42 points, or 11.08 per cent, to 9,387.61, its biggest one-day point gain ever and its biggest percentage gain since 15 March, 1933.

Meanwhile, in a further boost to the economy, it was reported last night that the US government was set to buy $250 billion in equity stakes in banks.

While the scale of the Dow's recovery surprised many, it was greeted with caution after eight bruising days which saw the Dow shed almost 2,400 points. John Lynch, the chief market analyst for Evergreen Investments in Charlotte, North Carolina, said: "I'm not doing any backflips yet. We still have many challenges up ahead."

Jim King, the chief investment officer at National Penn Investors Trust, was also circumspect over the possibility of a prolonged recovery. He said: "Even if this is the beginning of a recovery, we're not just going to have up markets from here on in.

"We're not through the woods," he said. "We think there is collateral damage from this debacle."

Meanwhile, Denis Amato, the chief investment officer at Ancora Advisors, said it was too soon to say whether the US market has started to carve out a bottom and the credit markets where many companies turn for day-to-day loans would need to loosen for stocks to hold their gains.

With the US bond markets and banks closed yesterday for Columbus Day, it was difficult for investors to gauge the reaction of the credit markets to actions by the major governments.

The Dow's 11.08 per cent rise smashed the previous record for a points increase by the time the closing bell sounded, which occurred on 16 March, 2000, when the blue chips closed up 499.19, or 4.93 per cent.

The surge in the United States came after bleak warnings over profitability compounded the atmosphere of crisis surrounding Scotland's two major banks yesterday.

The Royal Bank of Scotland and HBOS used their statements giving details of the government's move to take substantial stakes in them to warn of expected further bad-debt write-offs.

On a momentous day for Scottish banking, shares in both RBS and HBOS fell as they issued their pessimistic and uncertain alerts about future trading.

Announcing that Lloyds TSB was slashing the price it would pay for its takeover, HBOS said conditions had "deteriorated significantly" in its markets since its interim results were announced in July.

Credit conditions and falling property prices were hitting the group's underlying profitability, and it was increasing its provisions for bad debts at both its retail and corporate business.

"HBOS now expects these factors to impact substantially on the management's expectations of the underlying result for 2008," the bank said in its statement.

The warning came in addition to the £690 million write-off associated with the sale of BankWest, its Australian business, announced last week.

The tone of the statement was significantly more pessimistic than when the company said at the end of July it was "well placed to compete in tougher markets".

Shares in the bank plunged 27.5 per cent to 90p on fears for the state of its trading and the cut in price from Lloyds, which analysts said was worth about £5.3 billion when the markets closed, less than half as much as when the deal was announced.

In stark contract, Lloyds TSB said it continued to trade well, with its retail business recording double-digit growth in pre-tax profits in the third quarter.

"The group remains well positioned to deliver a strong performance over the coming years," it said.

RBS shares also fell and the company noted that, since it announced its interim results on 8 August, "the market dislocation has accelerated, particularly during the unprecedented events of the last four weeks".

The company added that, "in light of this, it is difficult to forecast the results for the second half of the year with precision", but the next results will "be below the expectations of the board at the time of the interim statement".

As with the first half of the year, when the bank reported a loss of £692 million after write-downs, RBS traded profitably at an underlying level in the third quarter of 2008, it said.

But it added bleakly: "We expect that the deterioration in economic and financial market conditions may lead to a rise in impairment charges and further asset write-downs in the fourth quarter."

RBS would not comment on the extent of its fourth-quarter provisions, but Guy Whittaker, its finance director, said the write-downs in the second half of the year would be "materially smaller" than in the first.

The RBS statement removes any hope that the new chief executive, Stephen Hester, will be able to start with a clean slate, with credit-crunch problems set to dog the company into 2009. RBS shares dropped 8.4 per cent to 65.7p.

The next indication of trading for a Scottish bank will come when the Glasgow-based Clydesdale, owned by National Australia Bank, presents its full-year results on 31 October.

A spokesman would not comment, but the bank's small share of the mortgage market and conservative strategy mean observers are not expecting surprises.