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Rate cut hopes, bargain hunting lift stocks

European stock index futures rose sharply on yesterday, after U.S. and Asian stocks soared and investors bet on a U.S. rate cut later in the day.

LONDON - World stock markets put in a second consecutive session of strong bargain-hunting gains on Wednesday following a huge rally on Wall Street and amid widespread expectations of a sharp cut in U.S. interest rates.

The mood left the dollar weaker. Wall Street looked set for a weaker start, but only after the Dow Jones industrial average rose more than 10 percent on Tuesday. The Fed is widely expected to cut its key rate for the ninth time since September 2007 later on Wednesday, at least by 50 basis points. That would take rates down to 1.0 percent. Wall Street marked its second-best day ever on Tuesday as investors, convinced that central banks worldwide will cut rates even more, scooped up stocks that had been driven down to their lowest prices in more than five years.

Wal-Mart's stock rose after the world's largest retailer stuck to its 2009 sales growth forecast, saying it will weather the economic turmoil now and could come out even stronger than its rivals when the economy rebounds. Wal-Mart shot up 11.1 percent to USD 55.17 on the New York Stock Exchange. Investors have also been keeping an eye out for coordinated cuts. China's central bank cut banks' benchmark lending and deposit rates by 0.27 percentage point on Wednesday, the third cut in six weeks. The cost of one-year bank loans will fall to 6.66 percent from 6.93 percent, while the benchmark one-year deposit rate falls to 3.60 from 3.87 percent, the People's Bank of China (PBOC) said. The cut in interest rates takes effect on Thursday, the central bank said on its website. The PBOC gave no reason for the easing.The central bank also cut interest rates and reserve requirements on Sept. 15 and Oct. 8. The latter move coincided with rate cuts by leading central banks around the world. If they do not act together, the Bank of Japan will consider lowering its policy rate at a meeting on Friday, according to sources familiar with the matter. The Bank of England and the European Central Bank are both forecast to lower borrowing costs as well next week.How much any of these actions will turn around near-term prospects for major economies is unclear, especially since the U.S. labour market is forecast to have lost nearly 180,000 jobs this month.

But stock markets were rallying on the prospect and by a hefty bout of bargain hunting after recent losses. MSCI's all-country world index was up 3 percent after gaining 7 percent on Tuesday, led by the 10 percent-plus Dow gains.

The emerging market counterpart was also up 3 percent, but has still lost more than 60 percent so far this year. "The Fed doesn't have too many more rate cuts left at its disposal but there is still scope for them to ease further," said Darren Winder, an equity strategist at Cazenove.

"The market should be able to rally on from that. "We are due a significant rally from the levels we've got down to."

The pan-European FTSEurofirst was up 5 percent. Earlier, Japan's Nikkei average climbed 7.7 percent or 589.98 points to finish at 8,211.90. It has gained 14.6 percent over the past two days, but is down 46 percent for the year-to-date.

Yen rebounds

The dollar was weaker with the yen climbing after suffering one of its biggest ever drops against the dollar on Tuesday.

The dollar fell nearly 2 percent from late U.S. trade to 96.84 yen after having surged as high as 99.79 yen on trading platform EBS, well above the 13-year low of 90.87 yen struck last week.

On Tuesday the dollar soared more than 6 percent against the yen - the biggest one-day gain since 1974 and the second-biggest since being allowed to trade freely in 1973, according to data from Reuters Ecowin.

The euro gained three quarters of a percent against the dollar to USD 1.2810. "We've seen a significant reversal of risk aversion and those currencies which were sold against the dollar aggressively in the last month have seen a bit of a reversal," said James Shugg, an economist at Westpac. The euro zone 2/10-year government bond yield curve rose to its steepest level since March 2005 as the short-end outperformed longer-dated paper on hopes of interest rate cuts. The spread widened to 124 basis points from around 120 basis points late on Tuesday with the two-year yield hovering above a three-year low at 2.54 percent.

 

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