Investment group helps Dow rebound from earlier loss

The rise came on news of a $7.5 billion investment in Citigroup.

NEW YORK (AP) — Wall Street rebounded Tuesday after the Abu Dhabi Investment Authority said it will invest $7.5 billion in Citigroup Inc. — a vote of confidence for the nation’s largest bank, which has suffered severe losses amid the ongoing crisis in the mortgage market.

The Dow Jones industrials rose more than 220 points in yet another volatile session as investors were hopeful the financial sector can remain healthy despite an ongoing credit crisis. The banking industry has been battered in recent months as defaults on home loans have risen and rendered some mortgage-backed securities essentially worthless.

Major financial institutions, including Citi and its competitors, have had to book some $80 billion of writedowns on those holdings — a trend that has left the markets nervous about the full extent of the damage from soured loans. Citi’s ability to secure a capital injection raised hope others might be able to do the same.

“The Citi deal is certainly a relief after a series of negative news on Monday with respect to the financials,” said Todd Salamone, director of trading at Schaeffer’s Investment Research. Funds like Abu Dhabi’s “that have plenty of cash may be viewed as a potential rescuer given the balance sheet troubles the banks are having. A weak dollar makes it that much more possible.”

Still, the market showed some vulnerability to anyone raising the specter of a sagging economy, and that caused another day of big swings for major indexes. Concerns about further writedowns caused the Dow to fall 240 points Monday, bringing the blue chip index, along with the Standard & Poor’s 500 index, down 10 percent from recent highs, a decline that signifies a correction.

Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said he won’t be surprised if U.S. economic data over coming months is weak, and warned that recent central bank rate cuts have increased the risk of higher inflation. Meanwhile, Federal Reserve Bank of Chicago head Charles Evans said in a speech that further turmoil in financial markets could cut into business investment and curb consumer spending on big-ticket items.

According to preliminary calculations, the Dow rose 215.00, or 1.69 percent, to 12,958.44 after being up nearly 250 points earlier in the session.

Broader stock indexes also moved higher, with the S&P 500 index up 21.01, or 1.49 percent, at 1,428.23, and the Nasdaq composite index up 39.81, or 1.57 percent, at 2,580.80.