Stocks jumpy after rate cut

Credit markets remained tight following the news, with banks continuing to hoard cash. Treasury bond prices spiked as investors rushed to the comparative safe haven of U.S. government debt. The dollar tumbled versus the euro and yen. Oil prices slipped and gold prices rose.

The Dow Jones industrial average (INDU) lost a few points, with Alcoa and Bank of America dragging after the two companies reported weak results in the past two days.

The Standard & Poor's 500 (SPX) index rose 0.4% and the Nasdaq composite (COMP) gained 0.5%.

All three major gauges had tumbled at the open, then rallied shortly after as investors considered the emergency rate cut.

Also in the mix: a surprise rise in the August pending home sales index.

The Federal Reserve, in coordination with banks around the world, said it was cutting the fed funds rate by half a percentage point to 1.5%. The fed funds rate is a key short-term lending rate that impacts loans on credit cards, home equity lines and business loans. The Fed also cut the discount rate, a bank lending rate, by half a percentage point. (Full story)

This is the latest step taken by various agencies over the past week in an attempt to get banks to start lending to each other again. The Dow has lost 1,400 points and the three major stock gauges have fallen to five-year lows as panicked investors have fled stocks.

Credit markets: The emergency rate cut follows several days of dramatic moves on the part of the Fed to loosen up the credit markets, which businesses depend on to function day-to-day.

The absence of ready capital has hurt the broad financial system and consumers who can't get loans.

On Tuesday, the Fed said it will buy short-term debt that companies use to finance daily operations, directly from businesses. On Monday, it said it will make $300 billion available to banks in return for damaged assets, on top of $300 billion already available. And Congress approved the $700 billion bank bailout plan last Friday, allowing the Treasury buy bad debt directly from banks.

But despite all these developments, the stock market and credit markets have remained under pressure.

The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, slipped to 0.57% from 0.69% late Tuesday, indicating investors are willing to take a very small return on their money. Last month, the 3-month bill skidded to a 68-year low around 0% as panicked investors fled stocks.

The TED spread, which is the difference between what banks pay to borrow from each other for 3 months and what the Treasury pays, rallied to an all-time high of 4.02% from 3.56% Monday.

The wider the spread, the more reluctant banks are to lend to each other, rather than from the federal government. When markets are fairly calm, banks charge each other premiums that are not much higher than the U.S. government.

Treasury bond prices rallied, lowering the yields. The benchmark 10-year note gained 12/32, lowering the corresponding yield to 3.46% from 3.50% late Tuesday. Treasury prices and yields move in opposite directions.

Earnings: Late Tuesday, Alcoa (AA, Fortune 500) reported weaker quarterly sales and earnings that missed estimates, due to sluggish aluminum prices and demand. The Dow component also suspended its dividend. Shares fell 15% Wednesday.

Late Monday, fellow Dow component Bank of America (BAC, Fortune 500) reported weaker profit that missed estimates and cut its dividend. The company said it will raise $10 billion through a stock sale and will need to set aside money for bad loans through the next year. Shares fell 26% Tuesday and another 9% Wednesday.

Global markets: Markets overseas tumbled again Wednesday, with Japan seeing one of its worst days ever as the Nikkei slumped 9%. European markets slid as well, despite the coordinated central bank actions. (Full story)

Oil and gold: U.S. light crude oil for November delivery fell 40 cents to $89.66 a barrel on the New York Mercantile Exchange.

COMEX gold for December delivery rallied $23.20 to $905.20 an ounce.

Other markets: In currency trading, the dollar slipped against the euro and the yen.