LONDON, Aug 17: European and US stocks rebounded on Friday as the US Federal Reserve slashed the lending rate it charges commercial banks in the most dramatic twist since fears of a credit crunch gripped world markets last week.
The action by the US central bank, aimed at boosting the liquidity of banks, helped share prices to recover from losses over the past week caused by fears of a financial crisis linked to the troubled US housing market.
“The Fed confirmed to markets that in the event of any worry about liquidity, it is ready to intervene,” said an analyst at French investment bank Natixis, Rene Desfossez.
“Investors were reassured to see that the Fed was behind the banking sector and took on the role of ensuring stability in the financial system.”
The US central bank cut its so-called discount window rate by 50 basis points to 5.75 per cent, making it cheaper for commercial banks to borrow from it and easier for them to continue lending.
The Fed acknowledged the threat to economic growth of a credit crunch -- in which banks suspend normal lending practices -- and, in a separate move, injected another $6 billion into the banking system.
In late morning trading in the United States, the Dow Jones Industrial Average was up 0.86pc to 12,956.58 and the tech-rich Nasdaq added 1.22pc at 2,480.97.
The broad-market Standard & Poor’s 500 rose 1.27pc to 1,429.14.
In Europe, the London, Frankfurt and Paris closed higher, erasing earlier losses.
London’s FTSE 100 index of top shares closed up 3.50pc at 6,064.20 points, the Frankfurt Dax closed up 1.49pc at 7,378.29 points, while in Paris the CAC 40 index of leading shares gained 1.86pc to 5,363.63 points.
The surge by London’s FTSE 100 index erased most of its losses on Thursday, when the London market dived 4.1pc, its biggest fall since March 2003 during the run-up to the Iraq war.
Analysts said that the Fed move increased the chances that it would slash its main interest rates -- the federal funds rate -- which stands at 5.25pc.
Lower lending rates tend to support rising share prices because they decrease company loan repayments, while increasing consumers’ disposable incomes.
But some analysts cautioned that the gains on Friday could be temporary, given the volatility seen on global markets over the last week.
“The markets have taken the Fed move as a positive step, but this may prove to be a knee-jerk rally,” said Martin Slaney, head of spread betting at GFT Global Markets in London.
“This looks like a U-turn from the Federal Reserve, which only a few days ago suggested it was not too concerned about the credit squeeze.”
Friday trading began with further big falls for Asian shares, as investors reacted to more bad news linked to the US housing market, which is already beset with concerns over the slumping high-risk subprime loan sector.
Heavy selling in Tokyo – Asia’s largest bourse -- quickly spread across the continent, with major markets there losing more than five per cent.
Traders are worried that the US problems could spark a credit crunch -- a tightening of global lending conditions as banks restrict access to credit to investors and companies alike. Japanese shares finished on Friday with a massive 5.42pc loss, suffering the biggest one-day points drop since April 2000.—AFP