Monday's bankruptcy by Lehman Brothers was still impacting stock markets on Tuesday. (Katsumi Kasahara/Associated Press)

Investors might have been expecting an interest rate cut but were quick to shake off their surprise when the Federal Reserve decided to leave rates alone, buying enough stocks to bring the Dow Jones Industrial index up by more than 140 points by end of trading Tuesday.

In Canada, the TSX pared back triple-digit losses in the morning to a 27-point drop by the end of the day.

Black Tuesday brightens

Tuesday was supposed to be far worse for global equities.

On Monday, both the Dow and the TSX lost more than four per cent of their value after the announcement that Lehman Brothers had slipped into bankruptcy and Merrill Lynch had been purchased by the Bank of America.

Investors were expecting more of the same the next day, and early Tuesday, they looked to be correct.

By mid-morning, the TSX had dropped to 11,974, down 279 points, or 2.2 per cent.

Besides the residual nervousness from Monday's financial debacle, falling oil prices, which punched through the $100 US a barrel level this week for the first time since March 4, also hurt the Toronto market.

The price for light, sweet crude slipped a further $2.57 Tuesday declining to $93.14 on the New York Mercantile Exchange.

International investors have been shedding Canadian stocks throughout the summer, partially in response to shrinking oil values. Since September, the TSX has lost 12 per cent of its total value.

The Dow Jones industrial index also dropped 125 points, or 1.2 per cent, as markets opened. But buyers quickly outnumbered sellers, leading to a big swing in stock values.

By the close of trading, the Dow index was up 141 points to 11,059.02.

Investors surprised analysts with the turnaround since the Federal Reserve had been widely expected to cut rates by at least 25 basis points in its decision on Tuesday.

Instead, the American central bank stayed on the sidelines, leaving the fed funds rate at two per cent.

Fed move still questioned

Even after the decision was announced and markets began turning positive, economists were still wondering whether the Fed's decision was the correct one.

"In our view this statement is either very brave or very reckless. Not to acknowledge the catastrophes of the next few days runs the very serious risk that the Fed will be seen as Nero, fiddling as Wall Street burns," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

For his part, U.S. president George W. Bush is following the Federal Reserve's lead by remaining on the sidelines while markets correct themselves.

On Tuesday, the White House canceled any press coverage of President Bush's meeting with his chief advisory group on the reeling financial markets. Bush was scheduled to make a statement Tuesday to a pool of White House reporters after huddling with his financial working group.

Spokesman Tony Fratto says the White House decided it would be best to limit public comment about markets.

With files from Associated Press