World markets rise after U.S. bank rescue plan
World stock markets rose Tuesday with a record day in Japan leading to stronger European shares and a solid open on Wall Street, as markets welcomed the U.S. government's plan to pump $250 billion US into banks and shore up the country's financial system.
Wall Street's early gains came in the wake of Monday's record one-day 936-point jump and the strongest ever daily performance Tuesday on Japan's benchmark Nikkei 225 index, which surged 1,171.14 points, or 14.15 per cent, to close at 9,447.57. Tokyo financial markets were playing catch-up because they were closed Monday for a holiday.
The Dow Jones index of leading U.S. shares was 183.19 points, or 2.0 per cent, higher, having opened nearly 400 points higher.
In London, the FTSE 100 index of leading shares was up 146.94 points, or 3.5 per cent, at 4,403.84 by late afternoon local time despite news that inflation in Britain is running at a 16-year high. Germany's DAX was up 167.54, or 3.3 per cent, at 5,229.99 even though a group of leading German economic think-tanks said Tuesday that Europe's largest economy is on the "brink of a recession."
The CAC-40 in France was 151.95 points, or 4.3 per cent, stronger at 3,683.45.
The resurgence in the markets follows unprecedented government efforts to bring an end to the financial crisis that has threatened the outlook for the whole global economy.
So far, government actions appear to have worked, at least in terms of boosting confidence in the financial markets.
"The sense of relief is obviously palpable, in terms of the share price gains, but minds will soon turn back to the state of the global economy," said Richard Hunter, a strategist at Hargreaves Lansdown in London.
The U.S. became the latest to announce plans buy stakes in its banks.
U.S. President George W. Bush unveiled the $250 billion plan to buy stakes in nine banks and argued that the drastic steps would help stability return to the U.S. banking sector.
"This is an essential short-term measure to ensure the viability of America's banking system," Bush said.
The U.S. package comes a day after European governments unveiled plans to take stakes in their banks under a package of guarantees and other emergency measures worth some euro1.7 trillion ($2.3 trillion).
The long-term key to whether the rescue packages work is whether the flurry of activity can actually break the logjam in credit markets and the early indications are that there has been some easing in rates and spreads.
The interbank lending rate for three-month euro loans, known as the Euro Interbank Offered Rate, or Euribor, fell 0.08 percentage points to 5.24 per cent from 5.32 per cent the day before. Rates had fallen on Monday as well, but by a more modest 0.06 percentage points.
The equivalent dollar rate fell 0.12 per cent to 4.64 per cent, while pound rates are 0.02 per cent down at 6.25 per cent.
Though the rates are falling, the differential between the rate at which banks lend to each other and official central bank lending rates remain high, signalling a strong degree of mistrust still exists. In the U.S. the base central bank rate is 1.5 per cent, in the euro area it is 3.75 per cent and 4.50 per cent in Britain.
"The money markets remain the focus to gauge the extent to which healing has occurred and the conclusion is that these are early days," said Divyang Shah, a strategist at Commonwealth Bank of Australia.
Earlier, Asian governments took more steps to fortify their own financial systems, helping stock markets across the region to rally. Authorities relaxed regulations on companies buying up their own shares, a change that will help prevent takeovers and allow companies to prevent a nose-dive in their own issues.
Japan also promised to continue to protect people's insurance policies and savings accounts, and said it will consider capital injection into medium-size and small Japanese financial institutions.
And in Australia, the government announced a plan to inject 10.4 billion Australian dollars ($7.4 billion) to strengthen the country's economy, helping send the S&P/ASX200 index 3.7 per cent higher. Hong Kong promised to guarantee all bank deposits until 2010.
Hong Kong's key index ended up 3.2 per cent, while South Korea's market jumped more than six per cent. The Philippine market surged more than seven per cent and Indonesia's market — shut half of last week due to dramatic declines — was up more than six per cent.
Only China's market fell — sliding 2.7 per cent.
Russia's stock markets joined the surge Tuesday, prompting regulators to suspend trading on one of the two major exchanges.
The MICEX, where most of Russia's trading takes place, climbed 11.2 per cent before trading was halted for an hour. The RTS climbed 6.4 percent.
Oil continued to rise, with light sweet crude for November delivery gaining $0.76 to $81.95 a barrel in European trade on the New York Mercantile Exchange.
In currencies, the dollar was slightly lower on the day at 102.65 yen, and the euro was stronger at $1.3715, though off earlier highs.