U.S. stocks staged a strong mid day rally Tuesday to finish in positive territory for the second day in a row, shaking off deep losses as optimism grew ahead of a fresh wave of bank earnings and guidance from the Federal Reserve.

The Dow Jones Industrial Average erased triple digit losses to finish up 75.53 points, or 0.74%, at 10229.96, with materials and energy stocks leading the way.

The market started the day down heavily, on the back of lower than expected corporate earnings, before launching a noontime surge that lasted throughout the day.

Traders said the market's afternoon change of heart was initially sparked by speculation over what the top central banker might say in semi annual Congressional testimony on Wednesday, including the possibility of a further loosening of monetary policy.

That chatter was quickly discounted by investors and market watchers

, but stocks were able to hang onto their gains as investors braced for late Tuesday earnings from tech giants Apple and Yahoo, and Wednesday morning numbers from a pack of financial institutions, including Morgan Stanley, Wells Fargo, Northern Trust and U.S. Bancorp.

Optimism also built for the release of Apple's quarterly reports after the market closes, which are widely expected to surpass estimates.

Shares of Apple closed up 2.6%. The Nasdaq Composite Index gained 1.10%, to finish at 2222.49. The Standard & Poor's 500 share index rose 1.14%, to close at 1083.48.

Materials stocks, whose demand is often tied to economic growth, led the gains. Cliffs Natural Resources rose 8.2%, while U.S. Steel gained 7.5% and AK Steel Holding climbed 6.7%. Investors initially retreated from Goldman Sachs Group after its second quarter earnings slid 82%.

The giant investment bank was socked by its settlement with the Securities and Exchange Commission and the U.K.'s payroll tax. But adjusted results beat Wall Street forecasts, and shares were recently up 2.2%.

Technology stocks were relative laggards, weighed by disappointing second quarter revenue reports from bellwether companies including International Business Machines, off 2.5%, and Texas Instruments, down 3.1%. Health care stocks were also weak, weighed by a 1.7% drop in Johnson & Johnson.

The health-care products giant's second quarter earnings rose 7.5% amid slightly higher sales, but the company cut its 2010 earnings forecast.

PepsiCo rose 4.3%, after the company reported success in the launch of a new line of Gatorade drinks, while motorcycle maker Harley Davidson jumped 13.6% after its struggling financial services operations swung to the black.

Investors shrugged off the June slide in housing starts, a more than expected 5% to a seasonally adjusted annual rate of 549,000. Economists had been expecting a 3.2% drop. However, June building permits increased 2.1%, more than the expected 0.7% rise.

European Markets

European stocks ended lower, but off their lows Tuesday, as a late session rally in the basic resources sector helped offset another round of weak U.S. housing data and disappointing results from Goldman Sachs.

The euro fell against the dollar, while oil and gold prices rose.

Early in the session, weakness in the telecoms sector and poor demand at a Hungarian Treasury bill auction kept stocks in the red. Most market participants deemed Hungary's auction a failure after it cut its three month Treasury bill offer to HUF35 billion from HUF45 billion.

Telecoms were hit after Cable & Wireless Worldwide said U.K. government spending cuts would slow earning growth this year. C&W Worldwide shares fell 17%.

European markets recovered late in the session on the back of rising metals prices, which pushed ArcelorMittal up 2.1% and Rio Tinto up 4.1%.

The Stoxx Europe 600 for the basic resources sector jumped 3%. The pan-European Stoxx 600 index closed up 0.1% at 246.35.

The U.K.'s FTSE 100 index fell 0.2% to 5139.46, France's CAC-40 index ended down 0.5% at 3468.02 and Germany's DAX fell 0.7% to 5967.49.

A rebound in banking stocks also helped stocks trim losses. The sector was under pressure for most of the session, with traders noting jitters ahead of the upcoming European stress test results.

However, by the end of the day, banking stocks had managed to turn higher, with the Stoxx Europe 600 index for the sector closing up 0.7%. Nevertheless, disappointing housing starts and worse than expected second quarter earnings results from Goldman Sachs ensured a negative close.

Figures showed housing starts fell 5% in June, compared with expectations for a 3.2% decline.

In major market action: Autos, tied to growth, led the decline in Europe on Tuesday, with Peugeot shares falling 2.5% and Fiat, which reports earnings on Wednesday, down 2.1%.

Daimler, which reported preliminary figures last week showing a quarterly profit and strong sales at its auto division, dropped 2.8%.

Telecom giant Vodafone Group updates investors on its quarterly trading performance on Friday. Shares fell 1.2% after ING cut its stance on the firm to hold from buy. Finnish mobile phone maker Nokia Corp. climbed 2.2% after a report that it plans to replace Chief Executive Olli-Pekka Kallasvuo.

Shares of Irish low cost airline Ryanair Holdings rose 1.8% after it said that its first quarter net profit fell to 93.7 million euros, from EUR123.0 million in the year ago period, hit by airport closures related volcanic ash, but operating revenue climbed to EUR869.8 million, from EUR774.7 million euros. Of low cost rivals, easyJet shares rose 1.1% and Air Berlin shares advanced 0.3%.

Swedish engineering firm Husqvarna advanced 11% after posting broadly flat second quarter sales of 11.5 billion Swedish kroner and a 30% rise in operating income to 1.48 billion kroner.

Asian Market

Asian markets ended mostly higher Tuesday as Chinese stocks marched ahead on continued expectations Beijing will avoid further tightening measures as the nation's economic growth moderates.

Japan's Nikkei Stock Average fell 1.1% as investors returned from a long weekend and reacted to the region's losses on Monday and Friday's sharp drop on Wall Street, although Dow Jones Industrial Average's gains overnight helped other markets in the region.

Australia's S&P/ASX 200 rose 1.0%, South Korea's Kospi gained 0.3%, China's Shanghai Composite advanced 2.2%, Hong Kong's Hang Seng Index rose 0.9% and India's Sensex inched fell 0.4%.

DJIA futures slipped one point in screen trade. Chinese shares staged a rally after Monday's strong show, with Anhui Conch Cement up 4.0%, Jiangxi Copper 8.2% higher and Poly Real Estate Group up 2.9%.

The jump in Shanghai came as analysts continued to revise their economic forecasts for China lower from robust earlier estimates but also predicted that policymakers won't tighten monetary policy in the near term.

Chinese shares in Hong Kong also bounced, with Agile Property Holdings up 4.7%, while Angang Steel Co. advanced 5.9%. Shares of BOC Hong Kong (Holdings) added 1.8% after China and Hong Kong inked an agreement to remove some restrictions on yuan usage and circulation in Hong Kong.

BOC Hong Kong is the only yuan-clearing bank in the Special Administrative Region. Hong Kong listed shares of Zijin Mining Co. jumped 7.4% after falling 19.9% over the past 5 sessions, as the company apologized for leakage from waste water at its Zijinshan copper mine hydro metallurgical plant.

Technology stocks led a broad based decline in Tokyo, weighed by results from IBM and Texas Instruments.

IBM dropped 4.3% in after-hours trading as revenue growth wasn't as strong as expected, while Texas Instruments shed 5.3% although its results were in line with forecasts. Among Japanese shares, Tokyo Electron dropped 2.9%, Advantest Corp. dropped 1.6% and Sony Corp. lost 2.8%.

Auto makers were weak as well, with Toyota Motor Corp. dropping 2.6%, Nissan Motor Co. falling 2.4% and Honda Motor Co. shedding 1.8%. Australian shares advanced, with miners and banks leading the path.

Aquarius Platinum jumped 13.6%, rebounding from Monday's 25% fall after the company said it had held 'pragmatic' talks with South African officials about safety improvements to its underground mines in South Africa's North West province.

The deaths of five Aquarius employees in an accident at the company's Marikana project on July 6 have sparked concerns that the provincial government would impose tough regulations to prevent rock falls.

In Seoul, Hana Financial Group dropped 2.1% after the company posted second quarter net profit of KRW180.8 billion, down from KRW196.56 billion a year ago.

Commodities

Base metals on the London Metal Exchange ended higher Tuesday in a commodity wide rally that broke away from a weaker euro and falling equity markets.

Traders said the fund and commodity index fund buying may have triggered short covering, as economic data and risk appetite didn't seem to support a strong performance.Copper closed 2% higher at $6,640 a metric ton.

Zinc and lead posted strong gains, ending 3.7% and 3.6% higher respectively. U.S. housing starts fell 5% in June to their lowest level since October.

Oil futures reversed an early morning drop to settle higher Tuesday ahead of inventory reports, as investors keyed on positive elements in the latest batch of largely disappointing corporate earnings.

Crude oil for September delivery, the most actively traded contract, settled up 68 cents, or 0.9%, to $77.58 a barrel, after trading as low as $76 a barrel earlier in the session. The contract for August delivery, which expired at the end of floor trading, rose 90 cents to settle at $77.44 a barrel.

Gold futures closed higher Tuesday as bargain hunters snapped up prices at two month lows, with gains limited by increased investor focus on the risks of deflation.

Gold for August delivery added $9.80, or 0.8%, to $1,191.70 an ounce on the Comex division of the New York Mercantile Exchange.

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