Hint of Washington deal triggers rally; futures fall late

By Rodrigo Campos

NEW YORK (Reuters) - Major U.S. stock indexes posted their strongest rally in more than nine months on Thursday after signs of progress in negotiations to raise the U.S. debt limit.

The market rally left the S&P 500 less than 2 percent away from its record closing high set three weeks ago, with traders now focused on an earnings season that begins in earnest on Friday with results from top banks JPMorgan and Wells Fargo.

However, more than two hours after the close of regular trading, equity futures contracts dipped on reports that President Barack Obama rejected a Republican plan to extend the debt ceiling by several weeks because it did not also end the partial government shutdown.

"The activity in multiple asset classes will be very sensitive for the next few days. We are watching this very closely like everyone else. Some people have been going into cash. I wish we were all focusing on matters of economics and earnings, but we are unfortunately trading on this soap opera," said Michael Cuggino, president and portfolio manager at Permanent Portfolio Funds.

House Republican leaders acted to break a logjam in negotiations by proposing a bill to raise the federal government's debt limit without attachments. The move was a significant shift for Republicans, who had tried to use the must-pass legislation to extract concessions from Democrats on spending and gutting the new healthcare law known as Obamacare.

Their proposal, which they planned to present to President Obama at the White House, would postpone the threat of a U.S. default from October 17 until the middle or end of November. The federal government would remain in a partial shutdown.

"What this is, is opening the door to discussion and negotiation when before we had two sides just finger pointing," said Peter Jankovskis, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois.

"We don't know if in six weeks we'll be in the same place, but at least this opens the possibility" of a lasting deal, he said.

In after-hours trading, S&P 500 E-mini index futures fell about 12 points after The New York Times reported on Obama's opposition to the Republican plan.

However, futures quickly pared those losses on news that Obama had neither accepted nor rejected the GOP proposal, and that talks were continuing. The E-minis were trading at 1682.25, down 2.75 points from the close at 4:15 pm ET.

The CBOE Volatility index <.VIX>, often used to measure the level of investor anxiety, plunged 15.9 percent to 16.48, near the level it was at in late September, prior to the U.S. government shutdown.

The Dow Jones industrial average <.DJI> rose 323.09 points or 2.18 percent, to 15,126.07, the S&P 500 <.SPX> gained 36.16 points or 2.18 percent, to 1,692.56 and the Nasdaq Composite <.IXIC> added 82.971 points or 2.26 percent, to 3,760.747.

The S&P posted its largest daily percentage gain since January 2, when yet another market pullback was reversed after politicians reached an agreement regarding the so-called fiscal cliff.

In one of the few economic indicators that continues to be published amid the federal government partial shutdown, data showed the number of Americans filing new claims for jobless aid touched a six-month high last week. A computer-related backlog of claims was processed and the partial government shutdown hit some non-federal workers.

This year's high-flying tech stocks rebounded after several days of declines. Facebook was up 4.9 percent to $49.05, Best Buy gained 7.5 percent and Netflix rose 5.4 percent. Among the year's best performers on the S&P 500, the stocks were the top drags in the market's recent decline.

Citrix Systems Inc shares were off 11.9 percent to $58.75 after the cloud-computing software maker estimated quarterly results below analysts' expectations because businesses had delayed contracts.

About 98 percent of the S&P 500 components posted gains. On the NYSE, more than six issues rose for every one that fell and on Nasdaq winners outnumbered losers by a ratio of 5.3 to 1.

(Reporting by Rodrigo Campos; additional reporting by Jennifer Ablan; Editing by Nick Zieminski, Kenneth Barry, Ken Wills and Chizu Nomiyama)

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