Shares recover after rate cut news sinks in
Yesterday, several central banks including the Bank of England, the European Central Bank (ECB) and the US Federal Reserve announced they were to cut interest rates by half a percentage point in an attempt to boost the economy.
However, the markets failed to respond to the news after London’s FTSE 100 closed down 5.18%, France’s Cac 40 was 6.3% lower, while Germany’s Dax lost 5.9%.
It is a different story today, however, as the markets absorb the news. In early trading, London’s FTSE 100 index was up 2.9%, while France’s Cac-40 was 2.7% higher and Germany’s Dax-30 gained 1.9%.
UK banking shares have suffered this week, particularly after Royal Bank of Scotland (RBDS had its credit rating downgraded by Standard & Poor’s. However, this morning, RBS is up 20%, HBOS up 27% and Lloyds TSB is up 10%.
Whilst the markets are recovering, across the Atlantic, US Treasury Secretary, Henry Paulson, has warned that despite the US $700 billion (£380 billion) bailout plan, some financial institutions will still collapse.
At a news conference in Washington, Mr Paulson said we will use all of the tools we have been given to maximum effectiveness, including strengthening the capitalisation of financial institutions of every size.
The news comes as Iceland’s largest bank, Kaupthing, has become the third bank to be seized by the Government in the last week alone.
Meanwhile, Russian stock markets have gained. In early trading today, the benchmark RTS index was up 5.5% while Micex index gained 7%. The markets have been re-opened following a suspension in trading yesterday.
However, in Asia, Japan’s benchmark Nikkei closed at 9,157.5, down 45.83 points. Yesterday, the Nikkei suffered its biggest one-day drop in over 20 years, with almost 10% wiped off its value.
The Bank of Japan did not participate in the co-ordinated rate move, as interest rates in the country are already near the zero mark.
In the meantime, UK Chancellor Alistair Darling, is off to Washington today to discuss the co-ordinated cutting of interest rates.