Market News: EU Bank Rescue, Moody’s Downgrade, IMF, Costco Earnings, Apple iPhone 4S, Dexia Spinoff, Yahoo Sale

Whiff of EU bank rescue ignites melt-up. News that FMs are pondering a backstop for shaky eurozone banks sparked a late-day 400 point rally in the Dow. Details of the plan are sketchy, but markets were hungry for a sign that EU diplomats are taking the unstable capital positions of their banks seriously. Much-maligned bank stocks rallied in Europe this morning, with BNP Paribas (BNPQY.PK), SocGen (SCGLY.PK) and Credit Agricole (CRARY.PK) all up more than 5%.

Italy shrugs off Moody’s downgrade. Moody’s downgraded Italy 3 notches from Aa2 to A2 with negative outlook, citing long-term funding risks for EU sovereigns, downside risks to economic growth, and the implementation risks to the government’s fiscal consolidation program. Markets, elated with the thought of an EU bank rescue (see above), shrugged off the news – as did Italy, saying the decision was “expected.”

IMF to the rescue. Antonio Borges, head of the IMF’s Europe program, said this morning eurozone banks need no more than €200B to restore investor confidence, “which in our view is very, very small compared to the size of the European capital markets.” Borges also said the IMF is willing to “invest alongside” the European Financial Stability Facility when it buys bonds from Italy and Spain, and that the IMF would “definitely participate” in a second bailout package for Greece if it demonstrated a willingness to solve its debt problems.

Costco proves it’s recession resistant. Costco’s (COST) FQ4 earnings rose a better-than-expected 11% to $478M ($1.08/share) as it continues to post sales and membership-fee growth. Same-store sales rose 11% in the U.S. and 14% internationally. Costco’s ability to attract value-driven buyers in a difficult economic environment, and its solid free cash flow, is one reason its chart is so pretty.

In Europe, the shrinkage begins. Eurozone private-sector growth contracted for the first time in two years, suggesting the broader economy could go into recession in Q4. Markit’s Services PMI fell to 48.8 from 51.5 in Aug. New business dove to 46.5 from 49.8, and expectations – which measures business optimism – shrank more than three points.

Did Tim Cook just leave the door open? Apple (AAPL) watchers were underwhelmed by yesterday’s Let’s Talk iPhone event, at which new CEO Tim Cook introduced a new iPhone 4S boasting an A5 chip, faster graphics, a better camera, and some neat voice features – but no gee-whiz chassis. The rare failure to wow fans could open a crack for Android providers; shares of Nokia (NOK), Ericsson (ERIC), HTC (HTCXF.PK), LG Electronics (LGEGF.PK), and Samsung (SSNLF.PK) all posted gains. Apple shares dropped more than 4% during the event, but recovered amid a broad late-day rally.

BNY Mellon cheated clients out of billions, AGs say. The U.S. AG in Manhattan and the New York AG filed lawsuits against Bank of New York Mellon (BK) Tuesday, saying it routinely charged customers inflated exchange rates on currency transactions, profiting to the tune of more than $2B. BNY Mellon denies any wrongdoing, saying the accusations are based on a flawed understanding of its role as a forex dealer.

Ben boosts bank stocks. Bank stocks rallied Tuesday after Fed chief Bernanke said he expects Operation Twist to yield the equivalent of a 20 bps cut in the fed funds rate. In testimony before Congress, Bernanke warned that the economic recovery “is close to faltering,” said Twist will provide “meaningful but not enormous support,” and cautioned monetary policy “is not a panacea.” Financial Select Sector SPDR ETF (XLF) rose 4%. JPM+6.5%. BAC +4.2%. C +5.5%.

Dexia could spin off big bad bank. Sources say flailing Dexia (DXBGY.PK) will set up a bad bank to park €180B in toxic assets, part of a larger plan that will look to dismantle the huge lender. France and Belgium will initially back the bad bank with guarantees, and eventually take over its ownership.

Yahoo gets its books in order. Yahoo (YHOO) gained another 6.9% Tuesday and is +2.2% premarket on reports of a joint bid featuring Alibaba (ALBCF.PK), and rumors the company is preparing to send financial information to potential buyers – a signal Yahoo is seriously thinking about a possible sale.

Stage set for foreclosure review. 4.5M current and former homeowners will have a chance to get their foreclosure cases examined to see if they should be compensated for banks’ mistakes. Borrowers deemed to have suffered financial injury could be eligible for compensation, but few if any borrowers are expected to have foreclosures overturned.

BofA to sever ties with smaller lenders. Bank of America (BAC) will shutter its correspondent lending business after failing to reach a deal to sell the unit to Fortress Investment (FIG). The closure will cut off a significant portion of the bank’s mortgage origination volume; loans purchased from correspondents accounted for $27.4B in originations during Q1.