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By Ellis Mnyandu
NEW YORK, Jan 28 (Reuters) - U.S. stocks surged on Monday as investors snapped up shares of manufacturers and downtrodden banks after more weak housing data bolstered expectations the Federal Reserve will slash rates this week.
A sharp drop in December new-home sales cemented the view that Fed policy makers, following last week’s emergency rate cut, will make another deep cut in interest rates on Wednesday after the conclusion of a two-day meeting. All three major stock indexes gained more than 1 percent.
While the housing data in itself was unsettling, the prospect of lower interest rates coupled with a proposed $150 billion economic stimulus package helped lift shares of manufacturers like General Electric Co (GE.N) and home builders like Hovnanian Enterprises (HOV.N).
The S&P financials index rose 2 percent, with index gainers outnumbering decliners by 6 to 1. It was the latest indication that investors are scouring the sector for bargains after months of relentless selling stemming from subprime mortgage losses currently amounting to more than $100 billion.
Shares of Bank of America Corp (BAC.N) , the No. 1 U.S. bank by market value, ended up more than 4 percent.
As global stock markets tumbled early last week, the U.S. central bank led by Ben Bernanke chopped rates by three-quarters of a percentage point in an emergency move, bringing the federal funds rate down to 3.5 percent.
“There’s hope that Ben Bernanke will do more on Wednesday,” said Alan Lancz, president of Alan B. Lancz & Associates Inc., an investment advisory firm in Toledo, Ohio. “Last week’s 75 basis-points cut was a nice turnaround, and some kind of follow-through will be good too.”
The Dow Jones industrial average .DJI rose 176.72 points, or 1.45 percent, at 12,383.89. The Standard & Poor's 500 Index .SPX shot up 23.36 points, or 1.76 percent, at 1,353.97. The Nasdaq Composite Index .IXIC closed up 23.71 points, or 1.02 percent, at 2,349.91.
Trading was volatile, with the stock market initially struggling to advance after the market opened. Toward the close the Nasdaq briefly turned negative but then immediately rebounded.
Bernanke and top officials are scheduled to meet Tuesday and Wednesday to decide rate policy.
Shares of GE, seen as a proxy for the economy because of its diversified businesses, finished up 2.1 percent at $34.72 on the New York Stock Exchange, making the stock the biggest gainer on the S&P 500, while those of Caterpillar Inc (CAT.N), also a bellwether, climbed 3.5 percent to $68.21, to be the top advancer on the Dow.
Among banks, shares of Bank of America Corp jumped 4.4 percent to $41.20 on the NYSE. Among home builders, shares of Hovnanian Enterprises Inc (HOV.N), an upscale U.S. home builder, soared 20.44 percent to $8.78.
Shares of No. 6 U.S. home builder Beazer Homes USA (BZH.N) advanced 22.2 percent. The Dow Jones home construction index .DJUSHB gained 5.9 percent.
Government data showing a bigger-than-expected drop in new-home sales last month strengthened the argument for a Fed rate cut, analysts said. Lower rates could ease the strain on mortgage borrowers and ease the cost of money for businesses.
U.S. short-term interest rate futures FFG8 showed perceived chances that the Fed would approve a half-percentage point rate cut on Wednesday rose to 90 percent.
Earnings news was mixed. Fast-food restaurant McDonald’s Corp (MCD.N) fell 5.6 percent to $51.07 after posting flat U.S. sales in December, but specialty glass maker Corning Inc (GLW.N) finished up 3.3 percent at $23.10 after reporting higher profit, boosted by strength in its display business.
On the Nasdaq, shares of Qualcomm Inc (QCOM.O) were the session’s top advancer, ending up 1.3 percent at $40.50. The mobile phone chip maker extended a climb fueled in part by its upbeat outlook from last week. (Editing by Leslie Adler)