Tokyo: Asian stock markets staged a cautious rally in early trade on Tuesday, lifted by an overnight rebound on Wall Street as investors pinned their hopes on another US interest rate cut, dealers said.
They said that news of a bigger-than-expected drop in December sales of new US homes had raised expectations that the Federal Reserve will cut rates again on Wednesday, following last week’s surprise emergency cut.
Market players were also monitoring US President George W. Bush’s annual State of the Union speech, with investors looking for more details on the government’s fiscal stimulus plan.
Asian markets clawed back some of Monday’s heavy losses but persistent worries about the outlook for the US economy limited the rebound.
Tokyo was up 1.84% by lunch, a day after tumbling by almost 4%.
Elsewhere, Hong Kong opened up 2.44%, Singapore rose 1.4% and Seoul put on 2.2%, while Shanghai was almost steady as some calm returned a day after a 7.2% dive.
Sydney, which was closed on Monday, slipped 1% as investors caught up with events on other global markets.
The US Commerce Department said Monday that December sales of new homes fell 4.7% and 2007 new home sales fell by a record 26.4%.
While the figures raised concerns about the health of the US economy, Wall Street responded positively as the data strengthened market expectations that the Fed will cut rates by up to 50 basis points Wednesday.
The Dow Jones Industrial Average closed up 1.45% on Monday.
“The rate cuts will provide a strong psychological support for the stock market,” said Peter Lai, director at DBS Vickers in Hong Kong.
“It will help ease fears that the US economy will be in recession. I don’t think the US economy will be in a recession. Maybe just a slowdown in growth.”
With most analysts predicting the Fed will trim at least a quarter point off its base federal funds interest rate, currently pegged at 3.50%, on Wednesday, there is a risk of disappointment if it does not act, dealers said.
And while a further rate cut in the US could temporarily boost investor sentiment, it would underscore the severity of the US economic slowdown, said Goh Mou Lih, Westcomb Securities research head.
“It just shows how bad the US economy is,” Goh said.
A surprise 75 basis point Fed rate cut last week helped calm the markets, but also raised jitters about why the central bank felt the need to make such a radical move.
The Fed has been cutting its rates since September after large banks began divulging hefty losses from ailing mortgage investments, triggering a credit crunch that has sparked fears of a recession in the world’s largest economy.
The administration of US President George W. Bush and congressional lawmakers are rushing to approve an economic stimulus plan worth around $150 billion which is likely to contain tax rebates and business incentives.
Bush acknowledged in his State of the Union speech that US economic growth was slowing but said in the long run Americans should be confident about prospects for their economy.
World oil prices crept higher in Asian trade, continuing a recovery seen in overseas trade after briefly falling under 90 dollars on concerns that crude demand may be hit by a US-led economic slowdown, dealers said.
Gold continued to shine with prices at record high levels, benefitting from its perceived status as a safe haven during times of economic upheaval, while the dollar was mixed against other major currencies.