(RTTNews) - As investors digest the implications of several government initiatives to help correct the crisis in the financial markets, stocks are posting standout gains in early afternoon trading on Friday. The strength comes after the Dow soared more than 400 points on Thursday.

Earlier in the day, the main U.S. securities regulator announced that it has temporarily banned short selling in nearly 800 financial stocks for the next 10 days in an effort to provide stability to the markets. The announcement follows a similar rule put in place by U.K. securities regulators on Thursday.

At the same time the Treasury Department announced that it has established a temporary guaranty program for the U.S. money market mutual fund industry. Under the program, which will last for the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund.

Additionally, the Federal Reserve Board announced that it would be using two enhancements to existing programs to promote liquidity in the markets. The first initiative extends the realm of non-recourse loans at the primary credit rate to U.S. depository institutions and bank holding companies.

The second initiative will allow the Federal Reserve to buy federal agency discount notes from primary dealers. These notes are short-term debt obligations issued by Fannie Mae (FNM), Freddie Mac (FRE) and the Federal Home Loan Banks.

Meanwhile, Treasury Secretary Henry Paulson defended his department’s plan to establish a trust fund to absorb bad debts Friday, stating that despite the cost taxpayers will have to bear for the fund the alternative would have been far worse.

Paulson urged Congress to approve the trust fund, the details of which will be hashed out over the weekend in time for congress to debate and vote on the legislation next week before they break for recess.

Paulson said the most recent proposal would address the “root cause” of the financial crisis: mortgage-backed securities stemming from the housing crisis.

“The events of the past seven days have altered the shape of the market and will impact the economy going forward,” said Joseph Brusuelas, chief economist of Merk Investments. “The current financial crisis reflects the failure of firms to deleverage in an acceptable period of time. The inability or unwillingness to accept the terms of re-capitalization offered troubled institutions has set in motion the financial train wreck of which we all bear witness.”

In an interview with RTT News, Russell Lundeberg, chief investment officer at Barrett Capital Management discussed the Fed, Treasury and SEC’s latest efforts to stem the financial crisis. He said that the government realized “they needed to do something that was above and beyond just playing catch up” and although “a lot of the details have yet to be worked out,” it “seems like this might be enough to bring that confidence back into the market.”

However, he predicts there is still going to be “a lot of movement in the market,” and because there are so many “unknowns” in the marketplace, he said, “There probably will be some hesitation by people to hold positions over the weekend.”

In recent trading, the major averages move back to the upside, although they remain off of their intraday highs. The Dow is currently up 431.12 at 11,450.81, the Nasdaq is up 77.70 at 2,276.80 and the S&P 500 is up 53.97 at 1,260.48.

While the strength in the markets has been substantial in the past two sessions, stocks are only making up for the sharp losses earlier in the week. Despite the substantial volatility that has been seen over the course of the past week, the major averages are currently poised to end the week flat to modestly higher.

Sector News

The financial sector is leading the broader markets higher, as investors seem optimistic that the government initiatives will help correct the current credit crisis. Within the financial sector, brokerage stocks are turning in some of the best performances, with Merrill Lynch (MER) and Morgan Stanley (MS) leading the way, up 33 percent and 26.9 percent, respectively. The Amex Securities Broker/Dealer Index is up 12.4 percent, climbing further off the five-year closing low set on Wednesday.

Bank stocks are also sharply higher. The KBW Bank Index is up 11.7 percent, adding to a standout gain posted in the previous session. Earlier in the day, the index set a four-month intraday high. Wachovia (WB) and Washington Mutual (WM) are the leaders. Wachovia is up 35.2 percent, compared to a 27.8 percent gain by Washington Mutual.

The housing sector is also benefitting from the government’s efforts, with the Philadelphia Housing Index climbing 6 percent. The index is adding to a substantial gain posted in the previous session, and it set a four month intraday high earlier in the day.

Among housing stocks, PMI Group (PMI) and Radian Group (RDN) are two of the biggest gainers. PMI group is up 67.3 percent, adding to yesterday’s gain. Radian Group set a six-month high earlier in the session, and it is currently up 34.8 percent. Late Thursday, Radian announced that it has completed a primary component of its capital plan.

Some commodity stocks are posting notable gains as well, including steel, oil and oil service stocks. The Amex Steel Index is up 9.9 percent, the Amex Oil Index is up 6.9 percent and the Philadelphia Oil Service Index is up 7.2 percent.

Other stocks that are sharply higher include health insurance, wireless and networking index. The Morgan Stanley Healthcare Payor Index is up 6.7 percent, the Amex Wireless Index is up 5.2 percent and the Amex Network Index is up 4.4 percent.

On the other hand, some real estate stocks are posting losses. The Morgan Stanley REIT Index is down 0.1 percent.

Stocks In The News

Among individual stocks, NVIDIA (NVDA) is seeing significant buying interest in early afternoon trading. Late Thursday, the company revealed that it is reducing its workforce by 6.5 percent to allow for continued investment in strategic growth areas.

Shares of the chipmaker are currently trading higher by 4.9 percent, adding to gains posted in the previous three sessions. With the gain, the stock is climbing further off of a three-year closing low set on Monday.

VeraSun Energy (VSE) is also posting a substantial gain, up 19.2 percent. The company said late Thursday, that in light of strategic interest expressed by multiple parties, it has retained Morgan Stanley to act in an advisory capacity to evaluate strategic alternatives during its current equity offering. VeraSun also said it has suspended a previously announced equity offering.

On the other hand, Palm (PALM) is seeing substantial weakness after the company reported a wider net loss for the first quarter compared to last year, as its gross profit fell due to the increased cost of revenue. The stock is down 5.9 percent, although it is reversing only a portion of the gain posted in the previous session.

Other Markets

Stock markets across the Asia-Pacific region rallied on Friday, mirroring Wall Street’s steep gains overnight. The Hong Kong market and the Chinese markets surged up more than 9 percent each, while Japan’s Nikkei index gained 3.4 percent.

The major European markets turned in standout performances as well, with the French CAC 40 and the German DAX Index ending the day up 9.3 percent and 5.6 percent, respectively, while the U.K.’s FTSE 100 Index advanced 8.8 percent. The buoyancy is attributed to the banning of short selling and the reports of a U.S. government rescue plan for the beleaguered financial firms.

Meanwhile, treasuries continue to show substantial weakness. Subsequently, the yield on the benchmark ten-year note is currently soaring 34.1 basis points at 3.778 percent.

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