US Fed cut prompts European rally

Irish and European stock markets rallied yesterday as the US central bank announced that it was cutting its key interest rate by a record 75 basis points to 3.5 per cent.

The Dublin market staged one of the strongest recoveries in Europe, with leading shares reclaiming much of the €3.5 billion lost as panic-stricken investors dumped equities on Monday.

The Iseq index of Irish shares gained 3.77 per cent, compared with increase of 1.9 per cent in the pan European FTSEurofirst300 index of the continent's top listed companies, and a jump of 2.9 per cent in London. The Dax in Frankfurt finished 0.3 per cent off.

But European markets still endured a volatile day. The FTSEurofirst300 actually dropped by 4 per cent earlier in the day before snapping back and gaining ahead of the close of business.

"Dublin has outperformed all other European markets," one dealer commented yesterday. "We started off very positive today, and we stayed 1 per cent or 2 per cent ahead of everybody else."

He added that the Fed announcement gave a further boost to the market, lifting financial and other key stocks by between 3 per cent and 4 per cent at the end of yesterday's session.

He pointed out that this matched the pattern of the last four days' trading, which have seen the Irish stock market lose less than its European peers during sell-offs, and gain more on any upswing.

The trader did not agree that this was simply a once-off "dead cat bounce" sparked by the lows plumbed by the market during the previous day's trade.

"Ireland took a beating over the last six months and there's a sense that a lot of the bad news is already factored into prices here," he said.

AIB, Bank of Ireland and CRH all saw their prices increase in line with the Iseq. Bank of Ireland once again saw larger than normal volumes of trade, with over 6.6 million shares changing hands.

The Federal Reserve's rate cut was the the biggest reduction for 23 years and the first inter-meeting cut since September 2001.

The move followed a slump across world stock markets on Monday sparked by fears that the US is heading for recession and taking the rest of the world with it.

The latest round of volatility was sparked by fears that the credit crunch in the US is about to take a turn for the worse. Recently a string of high profile banks have reported massive write offs, a result of the sub-prime mortgage crisis that broke last summer.

Investors are hoping for further cuts when the Fed holds its next formal meeting. Futures markets moved to price in a 70 per cent chance of the US central bank cutting rates by a further 25 basis points to 3.25 per cent at its policy meeting next week.

US markets, closed on Monday, suffered in early trade yesterday. By midday in New York, the Dow Jones Industrial Average was down 1.5 per cent, although that was well off earlier lows. The S&P 500 was 1.6 per cent lower and the Nasdaq Composite index was down 2.3 per cent.

There were further steep falls for Asian stocks before the Fed rate cut was announced. In Tokyo, the Nikkei 225 Average shed 5.7 per cent to end at a 28-month low, while Hong Kong tumbled 8.7 per cent, Shanghai 7.2 per cent and Mumbai 5 per cent. - ( Additional reporting, Financial Times service)