Car bailout, stimulus lift investor hopes

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By Daniel Trotta

NEW YORK (Reuters) - Progress toward a U.S. auto bailout and hopes for massive public works injected life into equity markets on Monday despite distress signals including new corporate job cuts and pressure for trimming interest rates that are already approaching zero.

Chinese and European leaders plotted their next steps as INVESTOR (INVEB.ES) looked to governments to lead major economies out of recession.

U.S. President-elect Barack Obama provided some hope with a weekend pledge to create more than 2.5 million new jobs by 2011 and launch the largest investment in U.S. infrastructure since the 1950s.

"Obama looks like he's going to be able to fast-track one of the largest infrastructure spending packages since the history of mankind," said Arthur Hogan, chief market analyst at Jefferies & Co in Boston.

Negotiators for outgoing President George W. Bush, who hands over power to Obama on January 20, made progress in talks with congressional leaders on a rescue package for automakers, and the White House said it was "very likely" a deal could be reached on Monday.

Such a deal may provide at least $15 billion in short-term loans, although analysts say the auto industry may eventually need closer to $125 billion to survive. The "Big Three" auto firms had sought $34 billion from Congress.

European carmakers focused on consolidation, with Italy's Fiat saying it is too small to survive on its own and Sweden reportedly considering a rescue package for Ford-owned Volvo and General Motors-owned Saab.

The U.S. talks gained urgency after Friday's U.S. employment data showed more than half a million jobs were lost in November.

Dow Chemical Co said on Monday it will cut 5,000 jobs, divest businesses and close plants less than a week after U.S. rival DuPont announced its own cutbacks.

Meanwhile the U.S. housing crisis that triggered the global credit crunch showed more ominous signs. Recent data suggests many borrowers who received help with mortgage modifications earlier this year tended to re-default on their payments, a top U.S. banking regulator said.

PRICE IS RIGHT?

With the Dow industrials down about 35 percent this year, some investors were choosing the present to begin a long-term equities strategy.

The Dow and the S&P 500 were up nearly 3 percent after European shares closed 6.9 percent higher and Japan's Nikkei 225 ended up 5.2 percent.

One of the largest U.S. money managers on Monday said U.S. stocks have broken their downtrend and will trade in a narrow range for as long as four months.

But Robert Doll, the global chief investment officer of equities at BlackRock Inc, also told the Reuters Investment Outlook Summit that financial shares will likely underperform for possibly years to come.

Another summit speaker, Margaret Patel, senior portfolio manager for Evergreen Investments, said high-grade corporate bonds and the top tier of high-yield bonds were very attractive with low risk and potential for high return.

China's leaders gathered to map out economic policy for next year, with the government struggling to shore up growth and jobs as export demand shrinks.

The "central economic work conference" met in a closed session likely to last three days to discuss ways to keep annual growth at 8 percent or higher, said a report on the official Xinhua news agency's website.

British Prime Minister Gordon Brown, French President Nicolas Sarkozy and European Commission chief Jose Manuel Barroso were due to address reporters after meeting with business leaders in London.

A European Union summit in Brussels on December 11-12 will study European Commission proposals to give the sagging economy a sharp boost with a 200 billion euro ($250 billion) spending plan.

The European Central Bank cut rates by a record 75 basis points to 2.5 percent last Thursday and economists expect another reduction in January.

The U.S. Federal Reserve has less room to maneuver as its Open Market Committee has trimmed its benchmark lending rate to 1 percent and market players anticipate a reduction to 0.5 percent or even 0.25 percent at the December 15-16 policy meeting.

(Additional reporting by Reuters bureaus worldwide; Editing by Steve Orlofsky and Brian Moss)

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