Dow's 5% charge may lead stock rally

European markets are likely to take heart this morning from a huge rise in the US market last night, with the Dow Jones index gaining almost 5 per cent on hopes of lower US interest rates in the months ahead.

The Dow rose by 380.53 points, its biggest one-day points gain to date. The market, which had been closed in Monday, got its first chance to react to weekend hints from US Federal Reserve Board chairman, Mr Alan Greenspan, that the next move in US interest rates will be downwards. By suggesting that the US could not escape the difficulties hitting many international economies, he has increased hopes of lower interest rates to help offset the impact of events in Asia and Russia.

Lower interest rates would stimulate markets by making borrowed money cheaper. It would also push the US dollar lower, giving a boost to American exports hit hard by Asia's financial crisis.

Earlier, nearly £1.4 billion was added to the value of Irish shares as the Dublin stock market, inspired by strong performances in other European markets and a good start on Wall Street, staged a welcome rally yesterday.

Yesterday market sentiment remained very nervous and dealers reported a great deal of scepticism about how sustained or longstanding the rally would be. However, the strength of the late rally on Wall Street - which saw the technology-laden Nasdaq index rise by 6 per cent - and signs of money coming back into the market may improve sentiment this morning.

The 3.78 per cent gain in the ISEQ index of shares was sparked by Wall Street's strong opening; it soared by 290 points or 3.7 per cent in the first half-hour of trade. The rate expectations were fuelled by Mr Greenspan, who said he no longer regards inflation as the primary threat to the US economy and suggested he was more inclined to cut than raise interest rates.

"Everybody is pointing the finger at Greenspan. He hinted that there is an opportunity to lower interest rates here. This puts the market place under a different microscope," said Mr Kenneth Ducey, director of trading at BT Brokerage, in New York.

Wall Street took heart from the comments, giving battered European markets a much-needed shot in the arm. Frankfurt, was the star performer as a strong afternoon rally in banking shares helped push the DAX up by 3.67 per cent. French stocks jumped by 2.93 per cent, their biggest gain since August 18th.

But given the recent turbulence in world financial markets, traders remained cautious. "In the short term, we're going to continue to see high volatility, as long as things in Russia are up in the air," one German trader said.

In London, the doubts came to the fore ahead of the close and the FTSE, which had reversed earlier losses to climb by nearly one per cent after New York's opening, fell again to close just 0.5 per cent higher as investors remained uncertain about the strength of the global rebound.

In Dublin, the leading shares were the main beneficiaries of the rally and AIB and Bank of Ireland each gained 55p to 875p and £10.75 respectively. But dealers here also remained cautious and expressed some concern that there appeared to be little institutional interest in the market.