Sharp opening rally as investors hope for credit lines to thaw

Small-cap stocks started the week where they left off late Friday, with the market on a steep upward thrust. The Russell 2000 (NYSE:IWM) soared 11.5% off the lows in the final hour of trading Friday afternoon, and was up another 3.4% at 10:14 a.m. ET, rising 18.02 to 540.50.

The market appeared to emphatically embrace the latest batch of emergency measures from governments around the world, geared to re-instill confidence in frozen credit markets and help avert an even deeper recession. It’s interesting to see that the big rally this morning — supposedly tied to hopes for credit markets to improve — was taking place on a day when the U.S. credit markets were closed for the Columbus Day holiday.

Over the weekend, G7 finance chiefs said that they would use “all available tools” to address the credit crisis, which has erupted into a full-blown global financial contagion. While the G7 statement probably wouldn’t have inspired this much relief for stock market investors, there were plenty of other measures, including an announcement by the Treasury Department that they were developing plans to purchase equity in financial institutions. Also, the United Kingdom said it would pour some 37 billion pounds (about $64 billion) into big banks, a move that German and French officials also said they would take. This morning, the leader of the new $700 billion bail out provided more details about how the program will work, which will help give a sense that a comprehensive plan is underway instead of the government simply hopping about willy-nilly, trying to stomp out fires when they occur. French President Nicolas Sarkozy said this morning that money was available for any bank that needs it and that the government will guarantee bank lending. The market is hopeful . . .

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