BackUS, European stocks surge as Fed cuts discount rate
US, European stocks surge as Fed cuts discount rate
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New York: Stocks soared at the opening of trading Friday after the Federal Reserve, acknowledging that the stock market’s plunge posed a threat to the economy, slashed its discount rate by a half percentage point.
The central bank’s step gave the market a boost after sharp declines earlier this week fueled by turmoil in the credit markets. The Fed has poured billions in additional liquidity into the banking system in recent days, but Friday’s rate cut _ a move Wall Street was angling for _ marked its most dramatic effort yet to alleviate fears about tightening credit and calm the global financial markets.
The Fed cut the discount rate to 5.75% from 6.25%, declaring that “downside risks" to the economy have increased appreciably.
However, the central bank did not change its target for the federal funds rate, which has remained at 5.25% for more than a year. Many strategists believes the market won’t settle down until the Fed lowers the fed funds rate -- the rate banks charge each other on overnight loans. The discount rate only covers loans the Fed makes to banks.
The question on Wall Street now is whether the discount rate cut is a signal that the Fed is seriously leaning toward cutting the fed funds rate at its next meeting on Sept. 18.
In the first hour of trading, the Dow Jones industrial average surged 284.35, or 2.21%, to 13,130.13.
European markets rebound
European stocks rebounded Friday after the U.S. Federal Reserve cut the primary discount rate, a dramatic move aimed at easing worries about tightening credit and calming global financial markets.
The U.K.’s benchmark FTSE 100 surged 3.4% to 6,060.60. France’s CAC 40 index rose 3.2% to 5,435.09 and Germany’s DAX index was up 2.7% to 7,463.90.
In the U.S., stock futures soared, erasing an early decline, as the Fed cut the discount rate to 5.75% from 6.25%, declaring that “downside risks" to the economy have increased appreciably.
That stemmed declines in markets that have suffered sharp declines over the past week amid turmoil in the credit markets. Central banks around the world have poured billions in additional liquidity into the banking system in recent days, but Friday’s rate cut marked the Fed’s most dramatic move yet.
“This move should be seen as more of a reassurance step, should interbank liquidity begin to dry up again," said ING economist Rob Carnell.
Earlier, in Asia, markets tried to buck the trend on early bargain-hunting, but began falling across the board to continue a worldwide selloff that has lasted more than a week. The Nikkei 225 index in Tokyo crashed 5.4% to end at 15,273.68, its lowest close in a year.
Hong Kong’s blue chip Hang Seng Index fell 1.4%, and the Korea Composite Stock Price Index lost 3.2% after dropping 6.9% the previous session.
Credit Suisse Chief Strategist Shinichi Ichikawa said any bad news ahead, such as a bank abroad faltering, could worsen the market jitters.
“The next couple of weeks will be a very tough time for global financial markets," he said.
U.S. stocks opened sharply higher Friday, with the Dow Jones industrial average jumping more than 200 points to 13,046.89. The Nasdaq Composite is up 57.49 to 2,508.49 and the Standard & Poor’s 500 index has gained 18.87 to 1,430.14.
Wall Street had a late recovery to finish mixed Thursday _ with the Dow Jones Industrial Average closing down just 16 points after falling more than 340 points during the day.
Earlier Friday, Japan’s central bank injected 1.2 trillion yen (US$10.5 billion; euro7.8 billion) into money markets _ the third injection this week and triple the amount it injected the day before -- in a bid to curb rises in key interest rates.
A weaker dollar led some Asian stocks down, as a lower dollar hurts Japanese exporters by reducing the value of their overseas earnings when converted back into local currencies. A weak dollar also makes Japanese exports more expensive abroad.
Toyota Motor Corp. fell 7.2% Friday, and Sony Corp. fell 6.8%. Suzuki Motor Corp. fell 11 percent and gamemaker Nintendo Co., which relies on overseas sales for much of its revenue, fell 9.7%.
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