The focus was undoubtedly on Lehman Brothers. A flurry of downgrades sent company shares down early in the session and they never recovered despite rampant speculation that CEO Dick Fuld is shopping the firm. Still, shares closed only modestly above session lows; they were down $3.03, or 42%, to $4.22 per share.

"The news is Lehman 24/7," wrote Dennis Gartman in his trading newsletter. "Although we admire Mr. Fuld's attempts to keep the great, and even historic, Lehman name intact, he is not likely to succeed. The Street smells blood and it will accept nothing less."

Lehman's woes were initially reflected in broader markets as fears about the broader financial system took hold. Early in the North American session, the S&P 500 traded 20 points lower at 1211 and ten-year yields were down 7 basis points to 3.56%. But markets engaged in a slow turn in sentiment that accelerated in the final minutes of trading.

Toronto's S&P/TSX composite index closed up 128 points to 12626, the Dow Jones industrial average up 165 points to 11434, the S&P 500 up 17 points to 1249 and the Nasdaq up 30 points to 2258.

The final surge in stocks was led by some of the financial firms that have been beat down the worst. Savings and loan bank Washington Mutual spiked 28.8% in the final 20 minutes of trading and 60% from its intraday lows. Similarly, insurance giant AIG spiked 7.8% in the final minutes and 27% from its morning lows.

The move led market watchers to speculate something was happening behind the scenes. There were also rumours of emergency Federal Reserve rate cuts. Fed fund futures are pricing a one-third chance of a rate cut by the end of the year, up from 14% a day ago.

"There are more concerns than anybody knows what to do with," said Marc Zabicki, senior market strategist at H&R Block Financial Advisors. "We're searching for something to move the market higher."

Economic data was mixed. U.S. weekly continuing claims jumped from 3403k to 3525k - the highest since October 2003. Initial jobless claims for the week ending Sept. 6 came in at 445k, against forecasts for a fall to 440k.

Inflation data was better than expected as U.S. import prices declined 3.7% month-over-month in August, below the consensus for a 1.8% drop.

The U.S. monthly trade deficit grew more than expected in July, widening 5.7% to $62.2 billion - the deepest since March 2007. The consensus estimate was $58.0 billion.

Trade figures were also worse than expected in Canada as the international merchandise surplus slipped to C$4.85 billion from C$5.6 billion. It was expected at C$5.6 billion and weighed heavily on the Canadian dollar, which was down 0.0069 to 0.9279 against the U.S. dollar (1.0783 USD/CAD) and down 1.34 to 99.19 against the yen.

Market watchers said the trade figures affected the Canadian dollar more than its U.S. counterpart because the rise in the U.S. trade deficit in July was related to high oil prices at the time while the decline in the Canadian surplus is expected to be more long-lasting.

The U.S. dollar was down 0.75 to 106.96 against the yen and the Dollar Index was up 0.313 to 80.158.

The euro was down 0.0056 to 1.3943 against the U.S. dollar, up 0.0036 to 1.5033 against the Canadian dollar, down 0.0030 to 0.7957 against the pound sterling and was lower by 1.65 to 149.14 against the yen.

The pound sterling was down 0.0006 to 1.7525 against the U.S. dollar and up 0.0112 to 1.8894 against the Canadian dollar.

The Treasury market rallied midway through the day after an unexpectedly strong 10-year note auction. The $12 billion reopening sold at 3.628%, 1.2 bps lower than the spot market at the time.

U.S. two-year yields were up 1.6 bps to 2.21%, with five-year yields up 1.3 bps to 2.91%, 10-year yields up 0.5 bps to 3.64% and 30-year yields down 1.1 bps to 4.21%. The Eurodollar March 09 contract was down 0.5 ticks to 97.23. The yield curve was flatter, with the 10/2-year spread down 0.8 bps to 141.88 bps.

"All the competing forces are creating an underlying bullish tone in the market," said Ian Lyngen, fixed income strategist at RBS Greenwich Capital.

Yields on two-year Canadian government bonds were up 1.9 bps to 2.73%, with five-year yields up 1.9 bps to 3.01%, 10-year yields up 2.7 bps to 3.49% and 30-year yields up 2.5 bps to 3.96%. The December 08 BAX contract was down 4.0 ticks to 96.94.

In Germany, returns on two-year German bonds were down 1.8 bps to 4.00%, with five-year yields up 0.7 bps to 3.90%, 10-year yields up 1.5 bps to 4.08% and 30-year yields up 4.7 bps to 4.62%.

Yields on UK two-year bonds were down 1.5 bps to 4.42%, with five-year yields down 1.5 bps to 4.36%, 10-year yields down 0.7 bps to 4.45% and 30-year yields up 1.9 bps to 4.42%.

Oil flirted with falling below $100 for the first time since April. WTI crude traded between $100.20-103.92 and closed down $1.56 to $101.02 per barrel.

Natural gas futures contracts are also dropping after the Energy Information Administration reported that underground natural gas storage in the United States increased 58 billion cubic feet in the week ending Sept. 5. The weekly increase was slightly above the +55 Bcf Bloomberg estimate. Henry Hub natural gas was down $0.148 to $7.245 mmbtu.

The front month gold contract at the Chicago Board of Trade was down $18.60 to $745.20 per ounce.

All data taken at 4:06 p.m. EDT.

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