Frankfurt/Washington: The European Central Bank was set to cut interest rates to a record low of 1% on Thursday, giving shares another reason to rise after the US treasury secretary indicated the downturn was bottoming out.Results of US government-inspired health checks or “stress tests” on 19 leading US banks due later in the day are set to show more than half in need of billions of dollars in extra capital. But treasury secretary Timothy Geithner said no US banks screened by regulators face the risk of insolvency.
Geithner also said the pace of the US economic decline was slowing, even as the economy faced enormous uncertainty. “There are some places where we’re seeing things starting to improve, but the main thing is a sense of stability,” he said.
The pan-European FTSEurofirst 300 index of top shares jumped to a four-month high, with banks leading the advance, following gains in Asia and on Wall Street.
Signs of recovery in the bank sector continued as Britain’s Barclays Plc said first-quarter profit rose 15% as a strong performance in investment banking made up for a big jump in bad debts, boosting its shares to a seven-month high.
Yet elsewhere there was more pain in the financial sector where the effects of the credit crunch are concentrated, as France’s Societe Generale made a surprise quarterly loss after higher-than-expected writedowns and provisions, sending its shares down over 7%.
Swiss insurer Zurich Financial Services AG posted a 75% drop in first-quarter net profit, falling well short of expectations after the group suffered $1 billion of losses and impairments.
With the European Central Bank rate decision due to be announced at 1145 GMT, markets were also focused on any alternative measures it takes to get the euro zone economy back on its feet.
Analysts polled by Reuters were unanimous that the ECB would make a quarter-point rate cut, which is likely to be its final reduction in the current cycle. Attention is turning to additional steps, such as quantitative easing — the repurchase of government debt with new money created by the central bank — which the ECB could take to fight the recession.
Another clue on the state of the Europe’s biggest economy will come in German industrial orders due at 1000 GMT, expected to show a drop of 0.6% in March, representing a slowing decline from a 3.5% drop the month before.
The Bank of England also holds its regular policy meeting and looks set to leave interest rates at a record low of 0.5% — also shifting the focus to whether it will announce new plans to boost the supply of credit in the economy.
“It looks highly probable that the Monetary Policy Committee will once again keep the overall stance of policy on hold and the target for asset purchases at £75 billion,” said Philip Shaw, economist at Investec.
Bank shares soared on Wall Street on Wednesday and the momentum carried over to Europe and Asia as investors welcomed more clarity on the health of the sector at the heart of the financial crisis.
In the United States, Geithner, speaking ahead of the release of bank stress tests at 2100 GMT, said the vast majority of screened banks would be able to raise capital on their own and none faced a threat of collapse.
“None of those 19 banks are at risk for insolvency,” he said, according to a transcript of a television interview.
Stocks, commodities, emerging market debt and high-yielding currencies have all rallied in recent weeks on hopes that the global economic slump might be reaching a bottom.
“The market now holds the view that the worst may be over, at least for America. A very strong bull market appears to have begun,” said Fumiyuki Nakanishi, manager at SMBC Friend Securities in Japan.
Asian stock markets climbed to a seven-month high, following Wall Street gains overnight. Tokyo led with a 4.6% rise to a six-month high, catching up after a three-day holiday.
Evidence still abounds of the recession squeezing companies and Nintendo disappointed investors with its profit forecast for this year.
But by and large markets have been shrugging off bad news and focusing on signs things are looking up. An Australian jobs report provided the latest of such signals, showing the economy created more than 27,000 new jobs last month rather than shedding 25,000 as expected.