Fed hopes drive stock rebound after sell-off

U.S. stocks edged up Friday as expectations of a Federal Reserve interest rate cut offset a warning by Merrill Lynch that revived concerns about credit conditions and the effects of the weak U.S. housing market.

The Dow Jones industrial average added 17.64 points, or 0.1%, to 13,442.52, lifting its gain for the week to 2.5% -- the best weekly performance since April.

Keeping the global credit squeeze at the forefront of investors’ concerns, Merrill Lynch said in a brief financial filing that it had made “fair value” adjustments to certain securities it held, such as those tied to sub-prime mortgages.

Although the brokerage didn’t provide specifics, the filing raised the prospect of write-offs that could hurt the company’s third-quarter earnings. The news also highlighted the risk to other brokerages’ earnings from the credit market turmoil of recent months.

Four major firms -- Goldman Sachs, Morgan Stanley, Lehman Bros. and Bear Stearns -- will report results next week for quarters that ended in August.

Despite Merrill’s warning, there was no wave of selling in financial stocks. The shares finished mixed.

Analysts say many investors remained focused on the Fed and the strong possibility the central bank will trim its key short-term rate, now 5.25%, to 5% or lower when policymakers meet Tuesday. Mixed economic data Friday didn’t damp hopes for a rate cut.

The session started with a sell-off, with the Dow falling 100 points at the opening. The market was rattled by the news that British mortgage lender Northern Rock said it couldn’t get financing from other banks and turned to the Bank of England for an emergency loan.

Britain’s main market index lost 1.2% for the day. The Spanish market slid 1.5%

But U.S. stocks quickly regained their footing. The Standard & Poor’s 500 ended up a fraction, adding 0.30 of a point to 1,484.25. The Nasdaq composite also was up slightly, gaining 1.12 points to 2,602.18.

Rising stocks narrowly outnumbered losers on the New York Stock Exchange and on Nasdaq.

For the week the S&P; rose 2.1% and the Nasdaq was up 1.4%.

The bond market was calm Friday. The 10-year Treasury note yield dipped to 4.46% from 4.47% on Thursday. The yield was 4.38% a week earlier.

Worries about British lenders helped push the pound down against the dollar. The dollar also retreated a bit against the euro. But the Canadian dollar surged to a 30-year high against the U.S. currency, reaching 97.1 U.S. cents, up from 96.9 cents Thursday.

In commodities trading, near-term crude oil futures slipped 99 cents to $79.10 a barrel. On Thursday the price closed above $80 for the first time amid continuing worries about future supplies.

Among the day’s market highlights:

* Merrill Lynch fell as low as $72.52 but rebounded to close off 49 cents at $74.65. Also in the sector, Goldman Sachs rose $2.12 to $190.59, Morgan Stanley fell 68 cents to $66.11, Lehman dipped 18 cents to $59.50 and Bear Stearns was up $2.36 to $117.19.

* Among other financial issues, JPMorgan Chase slipped 6 cents to $45.54 and Countrywide Financial gained 49 cents to $19.42.

* United Technologies boosted the Dow after investment firm Sanford C. Bernstein upgraded the company’s shares, citing the profit outlook for its Carrier air conditioner and Sikorsky helicopter units. The stock rose $1.12 to $76.14.

* Beaten-down shares of home builders attracted buyers. Hovnanian rose 97 cents to $11, KB Home was up 89 cents to $27.58 and Centex jumped $1.23 to $27.37.

* Yahoo advanced $1.01 to $24.73 after a Sanford C. Bernstein analyst said the stock could soar if the company shut down its new Internet-search advertising business, developed in an attempt to catch up with rival Google. Yahoo didn’t return a call for comment. Google was up $3.97 to $528.75

* RadioShack surged $1.60 to $23.66 on optimism that the planned addition of Microsoft’s Xbox 360 video-game console and its “Halo 3” title at some locations may spur holiday sales.