September 7, 2008 / 10:13 PM / 10 years ago

Futures soar after U.S. takes over GSEs

NEW YORK (Reuters) - Stock index futures surged on Sunday, pointing to a sharply higher open when Wall Street opens on Monday, after the U.S. government seized control of troubled mortgage finance companies Fannie Mae FNM.N and Freddie Mac FRE.N.

Traders work on the floor of the New York Stock Exchange, June 24, 2008. REUTERS/Brendan McDermid

The takeover, the latest move by the government to shore up the slumping housing market, was taken to ward off more global financial market turbulence.

While this is seen a major step to stabilize the financial system, persistent problems stemming from the housing slump will make a sustained rally unlikely, investors said.

“I expect there will be a powerful knee-jerk rally but we won’t be heading into a full-blown bull market,” said Jim Awad, chairman of W.P. Stewart & Co Ltd in New York.

S&P 500 futures rose 27.8 points and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures rose 212 points and Nasdaq 100 futures gained 38 points.

Officials were concerned mounting losses at the two companies, which own or guarantee almost half of the country’s $12 trillion in outstanding home mortgage debt, were sapping their vitality and threatening to undermine them at a time other sources of housing finance have largely run dry.

Despite an uncertain long-time outlook, Awad said the federal takeover is still “a positive for the credit market” because many financial companies own debt issued and mortgage securities guaranteed by the two government-sponsored mortgage finance enterprises.

Additional reporting by Richard Leong; Editing by James Dalgleish

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