LONDON – World stock markets on Tuesday recovered some of their hefty losses from the previous day, helped by a steady opening on Wall Street after the U.S. Federal Reserve announced that it would buy massive amounts of short-term debts in an attempt to ease tight credit markets.
The Fed said it is invoking a Depression-era power to buy commercial paper, a short-term financing mechanism that many companies rely on to finance their day-to-day operations, such as purchasing supplies or making payrolls. The $99.4 billion daily market for this crucial financing, which relies on investors rather than banks, has virtually dried up as most investors have become too worried to buy paper for longer than a couple days.
“The move is confirmation that the focus for policymakers has turned to limiting the impact of financial sector strains to the non-financial sector,” said Divyang Shah, an analyst at the Commonwealth Bank of Australia.
Hopes that the latest Fed move will help unclog credit markets initially pushed the Dow Jones index above the 10,000 mark. Bank of America Corp.’s announcement that it is looking to raise $10 billion and slash its dividend pared those early gains. But by late morning in New York, the Dow was down about 60 points at about 9,890.
In Britain, the FTSE 100 index was up 137.01 points, or 3.0 percent at 4,726.20 by afternoon in Europe. The CAC-40 index in Paris was 112.12 points, or 3.0 percent, higher at 3,824.10, while Germany’s DAX was up 72.30 points, or 1.3 percent, at 5,459.31.
There are hopes that the Fed’s move on commercial paper may be replicated in Europe too, even though the European Central Bank hasn’t got explicit authority to do so and that commercial paper does not feature as prominently in the 15-nation single currency zone.
Jacques Cailloux, economist at the Royal Bank of Scotland, said the ECB could already have the ability to do such purchases through open market operations the bank already has as a tool to provide banks with liquidity.
“It looks to us that the ECB has already got the framework that could allow it to buy commercial paper in the euro area directly from their issuers,” said Cailloux.
Europe’s markets were in positive territory earlier on hopes that the world’s leading central banks will cut interest rates soon, possibly in a coordinated manner to deal with the world financial crisis.
Those hopes, which were fueled by the Reserve Bank of Australia’s overnight move to cut borrowing costs by a massive 1 percentage point to 6 percent, helped diminish the impact of another bad day for bank stocks, particularly in Britain. Royal Bank of Scotland Group PLC shed around 40 percent of its value at one stage amid ongoing liquidity and solvency concerns and reports that the government might seek a stake in British banks to boost their balance sheets.
The Australian central bank’s cut was its biggest since 1992 and the scale of it was unexpected. Analysts were predicting a half-point cut, especially after the Australian dollar slumped by nearly 10 percent Monday.
The move sent Sydney’s S&P/ASX-200 index, which had opened 3.7 percent lower, up 1.7 percent to 4,618.7 and helped the Australian dollar push back up above 72.56 U.S. cents. Other markets, including the main indexes in South Korea, Singapore and Taiwan, rebounded after the bold move and market observers said the same could happen if other central banks follow suit.
The Bank of England is now seen as almost certain to cut interest rates on Thursday, with the questions now being asked are whether it will reduce borrowing costs by half a point to 4.50 percent for the first time in seven years. There has been speculation the Bank of England might join the U.S. Federal Reserve and the European Central Bank in a simultaneous cut.
RBS was not the only British banking stock in trouble amid news reports that the chief executives of Britain’s largest banks met up with British Treasury chief Alistair Darling and Bank of England governor Mervyn King Monday night to discuss the possibility of the government providing funding, thought to be around 50 billion pounds, in exchange for stakes in the banks.
Lloyds TSB PLC, which is in the process of taking over HBOS PLC, was down 11.0 percent, while Barclays PLC, which has denied it is asking for government funding, was 4.5 percent lower.
Confidence has also drained away in Iceland, which, according to the Prime Minister Geir H. Haarde is facing the prospect of bankruptcy after its banks went on the acquisition trail across the continent, accumulating massive debts in the process. The government’s latest response was to nationalize its second-largest bank Landsbanki under day-old legislation and fixed its currency exchange rate.
Japan’s benchmark Nikkei 225 index erased some of its early losses to close down 3 percent at 10,155.90 — still its lowest level in almost five years.
Russia’s stock markets made early gains after trading opened several hours late Tuesday, a day after suffering steep plunges. The RTS exchange resumed normal trading at 1 p.m. local time and was up 2.6 percent to 889.1 points an house later. The MICEX, where most trading takes place, rose by 3 percent to 774.5 points. It opened at 1:15 p.m.
The euro was trading at $1.3682 versus $1.3516 late Monday.
Associated Press writers Kelly Olsen in Soeul, Jay Alabaster and Tomoko A. Hosaka in Tokyo and Tanalee Smith in Sydney, Australia and Alex Kennedy in Singapore contributed to this report.