Global markets shoot up as US Fed cuts key rates

Global markets shoot up as US Fed cuts key rates
REUTERS & EEB

WASHINGTON/MUMBAI, JAN 3: World markets roared back on Thursday after the US Federal Reserve unexpectedly cut a key interest rate by half a percentage point to keep the world's largest economy from slowing too much. The tech-heavy Nasdaq index closed more than 14 per cent higher in its biggest ever single-day rise in response to a cut in key US interest rates.

Other markets including Hong Kong, India, Korea and London also surged ahead. The US Federal Reserve signaled it was prepared to cut borrowing costs further if needed to prevent the world's top economy from turning sour, electrifying global financial markets.

The Nasdaq composite, which took a heavy beating recently, was up 324.82 points or 14.17 per cent at 2,616.68 points yesterday, while Wall Street's benchmark index, the Dow Jones Industrial Average, was up 2.81 per cent or 299.60 points at 10.945.75 points. Hong Kong's Hang Seng index opened up nearly five per cent on the back of the Fed's move.

The Bombay Stock Exchange Sensex closed at 4115.37 as against yesterday's close of 4060.02, netting a rise of 55.35 points or 1.36 per cent. Tech stock like Infosys, Satyam, Wipro and others led the bull charge in Indian markets. Many infotech stocks opened near the 8 per cent upper circuit level. However, some of the old economy shares fell back after investors went after tech stocks.

In London, the FTSE 100 index was up 147.0 points or 2.4 per cent at 6,186.9, bouncing from a 135 point tumble in the previous session which had battered the index to its lowest close in some eight months. South Korean stocks stood out from the regional rally with the Korea Composite Stock Price Index (KOSPI) soaring more than eight per cent, before settling back to show a gain of 5.66 percent.

The shock US Fed move, which came four weeks ahead of the year's first scheduled meeting of the rate-setting Federal Open Market Committee, takes the crucial fed funds overnight bank lending rate to 6 per cent. The cut, decided in a conference call among FOMC members, was the first half-percentage point easing in that rate since mid-1992.

An interest rate cut is bullish for stocks because it ultimately lowers companies' borrowing costs. The market was hammered last year by fears that the slowing economy will hurt corporate profits.

To underline its determination to keep the economy from hitting a brick wall, the Fed also said its Board of Governors had decided to cut the more symbolic discount rate on Fed loans to banks by a quarter percentage point to 5.75 percent.

Financial markets surged within seconds of the Fed announcement, and advisers to US President-elect George W Bush -- who has expressed mounting concern over an economic slowdown as he prepares to take over the presidency Jan 20 -- welcomed the decision as a much-needed dose of viagra. It was the first time the Fed cut rates between regular FOMC meetings since the autumn of 1998, when a global economic crisis threatened to seize up world Financial markets.

Shortly after the Fed's announcement, the Dow Jones industrial average was up more than 3 per cent, while the technology-heavy Nasdaq composite index surged more than 11 per cent. "These actions were taken in light of further weakening of sales and production, and in the context of lower consumer confidence, tight conditions in some segments of financial markets, and high energy prices sapping household and business purchasing power," the central bank said in a statement.

"Moreover, inflation pressures remain contained. Nonetheless, to date there is little evidence to suggest that longer-term advances in technology and associated gains in productivity are abating," it added.

The Fed said that even with Wednesday's moves, it still saw the risks in the economy weighted toward economic weakness -- clearly signaling that more rate cuts may come soon, possibly at the FOMC meeting scheduled for Jan 30-31. "They'll do more if they need to to ensure that the economy doesn't go into a tailspin," said Dana Johnson, senior managing director and head of research at Banc One Capital Markets Inc. in Chicago. "They're absolutely committed to doing everything they know how to do to prevent a hard landing."

The Fed's move came as Bush was meeting with more than 30 business executives and chief executives about the state of the economy in a hotel in Austin, Texas.

Suddenly Lawrence Lindsey, Bush's Chief economic adviserand a former Fed governor himself, burst into an adjoining room where the media were being held to pick up the news from a television set. Asked how he felt, Lindsey beamed and said: "Great. The Fed is always right."

In recent weeks, Bush and his team have repeatedly warned the US economy is at risk of a dramatic slowdown, arguing this bolsters the case for an aggressive tax cut that has bee a centerpiece of Bush's election campaign.Wednesday's rate cut came hot on the heels of a slew of data which many analysts say have raised the odds of a sharp economic downturn that could hurt the rest of the world.