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World stocks return to red despite rate cuts - update

    Stock markets remained mired in steep losses on Wednesday, battered by fears about the world’s worst financial crisis in nearly 80 years and gaining only temporary relief from globally coordinated interest rate cuts.

 

Wall Street looked set to open lower, in line with stock markets in Asia and Europe. Reaction to the cuts -- which came from the US Federal Reserve, European Central Bank, Bank of England and People’s Bank of China, among others -- initially led equity investors to trim deep losses on many bourses. Immediate euphoria dissipated quickly.

MSCI’s main benchmark index of world stocks, for example, remained near 4-year lows, down 2.7% and around where it was when the cuts were announced. Its emerging market stock counterpart was off 7.4%. The pan-European FTSEurofirst 300 index was down 3.6% versus 2.9% before the cuts. Tokyo’s Nikkei share average, which closed long before the central bank moves, plummeted 9.4%.

Government debt prices jumped on the overall equity sell off and investors grabbed anything resembling stability, such as gold which rose 3% and the low-yielding Japanese yen. “It’s helpful,” said Jim Awad, chairman of W.P. Stewart & Co, referring to the concerted moved by central banks. “It’s a happy constructive event. It’s part of a process, but it’s not sufficient.” The rate cuts were just part of efforts by various authorities to inject calm and money into the battered financial system.

Britain unveiled a multibillion pound rescue package for its banks that included plans to inject up to £50 billion ($87.84 billion) of government money into the country’s biggest operators. It was designed to offer banks short-term liquidity, make new capital available and give the banking system enough funds to maintain lending in the medium-term. Investors had been calling for rate cuts before Wednesday’s move. Some now say they want more. “Where we go from now for rates is unclear, and we would suggest that rates should probably come down again,” said Philip Shaw, economist at Investec.

 

HISTORIC LOSSES

The losses on stock markets this week have been huge. MSCI’s world index, a gauge which many investors use to judge their performance, has already lost around 11% since Friday’s close and is on track for its worst week in the 20 years it has been in its current form. The emerging market benchmark is in the same boat, losing around 17.6% for the week to date. “Obviously equities are not the flavor of the month to put it mildly,” said Peter Dixon, UK economist at Commerzbank. In money markets -- at the heart of the crisis because of a freezing up of lending -- global interest rate cuts failed to remove persistent stress with the cost of interbank borrowing staying way above official interest rates.

Three-month dollar interbank rates were quoted at 5.85/6.21% on the Reuters system after the move by central banks. Just minutes before the rates announcement, the Libor dollar rate for three months was fixed higher on the day at 4.52375%. This compares with market expectations that the Federal Reserve rates will be around 1.25% by January compared with the new rate of 1.50%. Euro rates for the same period stood at 5.30/40% on Reuters system, compared with the new benchmark ECB rate of 3.75%.

 

YEN JUMPS, YIELDS FALL

The low-yielding yen surged across the board as investors rushed to unwind riskier positions. The central bank cuts trimmed the gains The yen hit a 6-month high against the dollar and a 3-year high against the euro, while higher-yielding currencies such as the Australian dollar fell sharply against the yen. The dollar was down 1.4% at ¥99.84, after hitting a low of ¥98.62, according to Reuters data. The euro was down 1.2% at ¥136.12. Interest rate-sensitive two-year Schatz yields was down 19 basis points at 2.992%. (Reuters)