New York: US and European stocks rebounded on 17 August as the US Federal Reserve slashed the lending rate it charges commercial banks in the most dramatic twist since fears of a credit crunch gripped world markets last week.
The action by the US central bank, aimed at boosting the liquidity of banks, helped share prices to recover from losses over the past week caused by fears of a financial crisis linked to the ailing US housing market.
“We think this is a very positive step by the Fed,” said Al Goldman, a chief market strategist at the AG Edwards investment firm.
The US central bank cut its so-called discount window rate by half a percentage point to 5.75%, making it cheaper for commercial banks to borrow from it and easier for them to continue lending.
The Fed acknowledged the threat to economic growth of a credit crunch — in which banks suspend normal lending practices — and, in a separate move, injected another $6 billion (Rs24,600 crore) into the banking system.
The Dow Jones Industrial Average closed up 1.82% at 13,079.08 and the tech-rich Nasdaq added 2.20% to 2,505.03.
The broad-market Standard & Poor’s 500 rose 2.46% to 1,445.94.
In Europe, the London, Frankfurt and Paris stock markets closed higher, erasing earlier losses.
London’s FTSE 100 index of top shares closed up 3.50% at 6,064.20 points, the Frankfurt Dax closed up 1.49% at 7,378.29 points, while in Paris the CAC 40 index of leading shares gained 1.86% to 5,363.63 points.
The surge by London’s FTSE 100 index erased most of its losses a day earlier(16 August), when the London market dived 4.1%, its biggest fall since March 2003 during the run-up to the Iraq war.
Some US economists said that the Fed move increased the chances that it would slash its main interest rates — the federal funds rate — which stands at 5.25%.
Lower lending rates tend to support rising share prices because they decrease company loan repayments, while increasing consumers’ disposable incomes.
But some analysts cautioned that the gains on Friday could be temporary, given the volatility seen on global markets over the last week.
“The markets have taken this move (by the Fed) as a positive step, but this may prove to be a knee-jerk rally,” said Martin Slaney, head of spread betting at GFT Global Markets in London.
“This looks like a U-turn from the Federal Reserve, which only a few days ago suggested it was not too concerned about the credit squeeze.”
Trading on 17 August began with further big falls for Asian shares, as investors reacted to more bad news linked to the US housing market, which is already beset with concerns over the slumping high-risk subprime loan sector.
Heavy selling in Tokyo — Asia’s largest bourse — quickly spread across the continent, with major markets there losing more than 5%.
Traders are worried that the US problems could spark a widespread credit crunch — a tightening of global lending conditions as banks restrict access to credit to investors and companies alike.
Japanese shares finished Friday with a massive 5.42%loss, suffering the biggest one-day points drop since April 2000.
Hong Kong share prices closed 1.40% lower, but reversed earlier sharp losses of 6.0% due to bargain hunting, dealers said.