US rate cut boosts global markets

BBC News
Friday, August 17, 2007

UK shares swung firmly back into positive territory following the US Federal Reserve's move to cut the rate at which it lends to banks.

The decision, designed to increase the flow of money in the US financial system, saw London's FTSE 100 jump 3.5% or 205.3 points to 6,064.2.

Relief was also felt in Wall Street, where shares opened sharply higher, and elsewhere in Europe.

After an hour, the Dow Jones had fallen back and was up just 1.1% at 12,986.7.

The technology-based Nasdaq was up 1.1% at 2,478.1.

At the end of the day in Europe, Frankfurt's Dax was up 1.49%, while the Cac 40 in Paris closed 1.86% higher.

All three main European indexes had veered in and out of the red throughout the day's trading.

See long term trends among the major stock market indexes
The Fed's rate cut is intended to help with the liquidity problems facing many banks following the US housing slump.

On Thursday, London's FTSE 100 fell 4.1%, cutting almost £60bn off the value of Britain's top companies.

Wait and see

The recent worldwide slide in share prices was triggered by problems in the US mortgage market.

The problems centre on the sub-prime sector, which offers higher-risk loans to people with a poor credit history.

As US interest rates have risen and the housing bubble has burst, a growing number of sub-prime borrowers have defaulted on their loans.

Because the lenders have often sold on the debt, this has led to extensive financial difficulties for a number of investment funds with heavy exposure to the sector - prompting fears of a wider financial crisis.

The worry for many investors is that stock market declines will resume next week, wiping even more money off the value of pension funds and global stock markets.

Analysts said there was no guarantee that Friday's upward trend would be maintained when trading resumed after the weekend.

Asian losses

The European share recovery followed big falls on Asian stock markets.

Japan's Nikkei declined 5.42%, its biggest points fall since April 2000, while Hong Kong's Hang Seng closed 1.38% lower.

The Bank of Japan injected 1.2 trillion yen ($10.7 billion; £5.4bn) into money markets, which was its third intervention of the week.

Japanese investors are worried that a slowdown in the US economy will hit exports from Asia.

There is also speculation that the Bank of Japan could raise interest rates next week, despite the problems on the market.

Elsewhere, the Australian central bank intervened to support its currency for the first time for six years.

The Australian dollar was facing its biggest one-day fall against the US dollar since it was allowed to trade freely in 1983.

The dollar has benefited from the financial crisis as investors sort a safe haven.

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