New York: A powerful Wall Street rally on Tuesday helped lift global markets a day after a near-meltdown as investor hopes grew on the prospects for a new US financial rescue package to ease the crisis.
The Dow Jones Industrial Average leapt 485.21 points (4.68%) to close at 10,850.66, in the third-largest single-day point gain a day after the worst one-day point loss for the blue-chip index.
The Nasdaq jumped 4.97% and the broad-market Standard & Poor’s 500 index rallied 5.27 percent, recovering a large portion of Monday’s losses.
“Equity markets jumped at the open and didn’t look back. Investors felt confident that lawmakers would pass a bailout bill by midweek,” said Sara Kline at Economy.com.
“The stock market’s drop yesterday got worldwide attention,” said Gregory Drahuschak at Janney Montgomery Scott.
“Every local and national radio and television news program had the drop as the lead story. This and a more organized chorus of business voices telling all who care to hear that the economy needs some plan could help to swing voter sentiment enough for Congressmen to look more favorably at a moderately revised rescue plan.”
Analysts said a further freezing up of credit markets may have sent a further chill into lawmakers, even if the stock market rallied.
Rates for US interbank loans surged as high as 7.0% and then fell to 0.5% at the end of the day in a hugely volatile day for credit markets.
The federal funds target set by the US central bank is 2.0% for mandatory bank reserves, but the Fed seeks to adjust the actual rate by adding or removing liquidity from the system.
The low federal funds rate however does not mean banks are taking big risks with their funds.
This is reflected in the LIBOR, or London interbank offer rate, that banks use for discretionary lending, and which surged to 4.0525% Tuesday. Normally this rate is close to the fed funds target but can be pushed up if banks hold their cash instead of lending it.
European shares were helped by the strong gains on Wall Street. In London, the FTSE 100 index of leading shares finished with a gain of 1.74% to 4,902.45, the Paris CAC 40 rose 1.99% to 4.032.10 and Frankfurt’s DAX added 0.41% to 5,831.02.
In other global markets, Brazil’s Bovespa bounced back with gain of 7.63% and Canada’s S&P/TSX climbed 4.15%. The Mexican Bolsa added 3.9%.
Most Asian markets closed down sharply - with Tokyo losing 4.1% to a three-year low and Sydney off 4.3% - but Hong Kong came back to finish with a gain of 0.8% after falling by more than six percent at one point.
Recovery in the US came after a record plunge of 777 points for the blue-chip Dow index Monday in the wake of a rejection by the US House of Representatives of a massive $700 billion plan to aid the troubled banking sector and steady a fragile economy.
Dealers said the hope was that the US rescue plan would eventually get through, especially as central bank efforts to get the commercial banks lending again seem to be getting nowhere.
Failing that, interest rates will have to be cut so as to lower the cost of doing business but with inflation still a worry, some, especially the European Central Bank, may be reluctant to do so just yet.