Hong Kong: Asian stocks rose and the yen slipped on Thursday after central banks from China to Europe and the United States cut interest rates to support the global economy, though investors remained fearful with credit markets still nearly frozen.
In an unprecedented display of international coordination, the Federal Reserve, the European Central Bank along with several others including China’s central bank on Wednesday executed an emergency rate cut, hours after equity markets plunged in Asia and Japan’s Nikkei chalked up its biggest decline since the 1987 crash.
Still, analysts said more will certainly have to be done by policymakers before the worst financial crisis since the Great Depression is over, particularly with a meeting of the Group of Seven rich nations coming up on Friday. In the meantime the historic actions have made price action more of a two-way street.
“The cut last night in interest rates by the central banks around the world is an important repair step. We now believe it is time for patient, long-term equity investors to start to commit funds to those top-quality companies that have been beaten down so badly,” said Donald Straszheim, vice chairman of Roth Capital Partners in Los Angeles, in a note to clients.
Tokyo’s Nikkei share average rose 1.3% after plummeting more than 9% on Wednesday to its lowest close since June 2003.
The MSCI index of Asia-Pacific shares outside of Japan rose 1.3%, edging back from the prior day’s 9% drop, which was the biggest single-day tumble in at least 20 years.
Hong Kong’s Hang Seng index rebounded 2% after three-days of losses had taken it to the lowest close in two years.
Australia’s benchmark S&P/ASX 200 index dropped 1.5%, led by the mining and bank industries, despite a full one-percentage point cut in borrowing costs earlier this week by the Reserve Bank of Australia.
The yen slipped after soaring higher overnight, with dealers unravelling some safety trades. However, many analysts say the yen will likely remain firm as long as the crisis persists because of the appeal of Japan’s current account surplus and its stable financial sector.
The dollar rose 1.1% against the yen to 100.24 yen rebounding from a six-month low of 98.60 yen hit on Wednesday.
The euro also recovered against the yen, up 0.9% at 136.60 yen after falling to a three-year low of 134.15 yen on Wednesday.
The global actions to ease monetary policy were not taken without risks. Economists said dysfunctional short-term lending markets could mute the intended effects of such broad-based measures. Without the flow of credit, the global economy is still likely on a path to slowing sharply.
“A risk for serious global recession has increased as the coordinated rate cuts are not doing much in stabilising financial markets. That would have an adverse effect on Asian economies, in which the manufacturing sector has a large share,” said Masamichi Adachi, senior economists with JPMorgan Securities in Tokyo.
Base metal prices continued to fall, with Shanghai zinc prices down by their 4 percent limit on concerns about industrial demand.
After more than a year of dislocations in money markets, which have spiralled in the last month, investors have become convinced any solution will take time to work.
Moments before the coordinated rate cuts, London interbank offered rates were fixed notably higher, leading to the biggest spread of 3-month LIBOR over overnight index swap rates -- essentially where central bank rates are expected to be headed -- since the credit crisis began.
Even after the central bank action, the Chicago Board Options Exchange Volatility index, better known as the VIX, shot up to a record high of 59.06, having risen more than 36 points in the last month.
Japanese government bonds fell as equity markets edged up. The 10-year JGB future was down 0.6 point to 138.98
US Treasury debt prices were flat after a sharp decline overnight after a poor auction for on older 10-year note issue. The benchmark 10-year yield which moves in the opposite direction of the price, was unchanged from late on Wednesday in New York, at 3.66%.
Like other developed bond markets, the difference of the 10-year yield over the 2-year yield - also called the yield curve - has been growing sharply over the last month as dealers anticipated a cut in the Federal Reserve’s target rate.
Even after the half-percentage cut by the Federal Reserve overnight, the curve steepened to 208 basis points, the most since June 2004.