Dow up nearly 200 as debt deal emerges

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NEW YORK (CNNMoney) Stocks surged Wednesday as investors cheered news that Senate lawmakers have reached a deal to reopen the government and avoid a possible U.S. default.

The Dow Jones industrial average jumped nearly 200 points, or 1.3%. The S&P 500 and Nasdaq were both up more than 1% in late morning trading.

Stocks have been trading higher throughout the day, but the rally accelerated after Sen. Kelly Ayotte of New Hampshire said an agreement on the debt ceiling could be announced soon. House lawmakers have not yet decided on when to vote on the Senate bill, according to a spokesperson for majority leader John Boehner.

Investors have been on edge in recent weeks as talks in Washington have repeatedly broken down. A failure to reach an agreement before Thursday could trigger a default on U.S. debt and chaos in global markets. Some analysts have downplayed the Thursday deadline though, saying the Treasury Department has enough cash on hand to pay most of its obligations until the end of the month.

Still, yields on short-term Treasury bills have been rising lately as investors worry about the possibility that the U.S. may not be able to pay all its bills. The U.S. auctions one-month T-bills and one-year notes later Wednesday. and investors will be keeping an eye on those results. Demand was lackluster for bonds sold on Tuesday.

Rating agency Fitch put the U.S. on notice Tuesday afternoon, warning it could soon downgrade America's credit rating because of the "political brinkmanship" on display in Washington.

U.S. stocks plunged after Standard & Poor's cut the nation's credit rating in 2011, although Treasuries rallied in a somewhat ironic flight to safety. At the time, S&P blamed the political wrangling around the last debt ceiling increase.

While most invest! ors are still betting on a last-minute deal, few expect lawmakers to agree on a policy that addresses the nation's long-term debt problems.

"People are confident that it's going to get done, but they will probably just kick the can down the road," said Bernard Kavanagh, vice president of portfolio management at Stifel Nicolaus. That means politics will continue to weigh on the market for some time, he added.

One potential bright spot? The continued dysfunction in Washington means the Federal Reserve is unlikely to cut back on, or taper, its bond-buying program anytime soon.

"With more uncertainty and the potential for the government shutdown to drag on the economy, the last thing the Fed wants to do is begin to taper," said Kavanagh. "That should give market a bit of a tailwind."

There were also plenty of earnings results to parse through Wednesday.

Shares of Bank of America (BAC, Fortune 500) gained after the financial giant reported better-than-expected third quarter results.

Mattel (MAT, Fortune 500) shares jumped after the Barbie and American Girl manufacturer reported quarterly revenue and profits that beat analysts' estimates.

  Barbie isn't worried about debt ceiling

Stanley Black & Decker (SWJ) tumbled roughly 10% after the power tools maker lowered its full-year earnings outlook. The company said it expected "uncertainty created by the U.S. government's sequestration and shutdown" to hurt business and consumer spending.

Meanwhile, shares in BlackRock (BLK, Fortune 500) and PepsiCo (PEP, Fortune 500) inched higher after both firms released quarterly results that topped forecasts. American Express (AXP, Fortune 500), IBM (IBM, Fortune 500) and eBay (EBAY, Fortune 500) are set to report after-hours.

After t! he bell T! uesday, Twitter announced plans to list on the New York Stock Exchange.

Intel (INTC, Fortune 500) shares slipped after the chipmaker issued a pessimistic outlook for the rest of 2013 and lowered its profit forecast late Tuesday. But shares of Yahoo (YHOO, Fortune 500) rose following its earnings report.

European markets were under pressure as investors around the world fret about the political mess in Washington. Asian markets ended mixed.