U.S. rate cut fails to raise Asian markets; European shares expected to fall
By Ian Chua ReutersPublished: January 31, 2008
LONDON: Worries about further losses for the financial sector got the better of European investors Thursday, putting pressure on stocks and taking the shine off another interest rate cut by the Federal Reserve. But most Asian stocks rose.
Investors in Europe were seeking the safety of government bonds after Fitch Ratings on Wednesday downgraded the bond insurer FGIC's credit rating and Standard & Poor's said it had cut or might cut ratings on hundreds of billions of dollars of U.S. mortgage-backed securities and collateralized debt obligations.
If bond insurers lose their top AAA ratings, U.S. financial institutions will face fresh write-downs of as much as $70 billion, according to Meredith Whitney, a banking analyst at Oppenheimer & Co., a brokerage.
That possibility overshadowed the relief the Fed provided Wednesday, when it cut its overnight rate target by half a point to 3 percent - the lowest since June 2005 - following an emergency 3/4 point cut last week to halt a sharp slowdown in an economy struggling with a housing slump and credit crunch.
"There was the knee-jerk reaction you'd expect with stock markets rallying, and risky assets rallying and the dollar under pressure," said Martin McMahon, foreign exchange strategist at Credit Suisse in Zurich.
"But the U.S. markets didn't hold on to their gains and a lot of the move reversed. There's some more bad news on monolines which is spooking investor sentiment on the general financial sector."
The fact that the Fed cut rates by 1.25 points in nine days was not grounds for optimism, he added, but a sign of a really grim outlook.
In late morning trading, the pan-European DJ Euro Stoxx 50 index fell 1.2 percent. The FTSE 100 fell about 1 percent, while the DAX in Frankfurt fell 1.4 percent and the CAC 40 in Paris dropped about 1 percent.
In Asian trading, the MSCI Asia Pacific index rose 1.6 percent. The S&P/ASX 200 index in Sydney rose about 0.6 percent, while in Seoul, the Kospi index rose 2.2 percent. The Japanese benchmark Nikkei 225 stock average rose 1.9 percent.
The Hong Kong benchmark Hang Seng index fell 0.8 percent.
Demand for less risky assets helped to lift safe-haven government bonds, pushing the March Bund futures up 25 ticks to 116.13. The 10-year Bund yields were down 2.2 basis points at 3.99 percent.
In the currency market, the dollar recovered from an early decline in reaction to the Fed's rate cut, rising 0.3 percent against a basket of major currencies as stocks lost ground.
It was up about 0.3 percent against the Japanese currency at ¥106.71, while the euro slipped 0.3 percent to $1.4842.
Among commodities, U.S. crude fell nearly $1.20 towards $91.13 a barrel on worries that heavier financial losses would drain the U.S. economy and hurt demand at a time when inventories of crude and gasoline are rising quickly.
foto:ecu.edu
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