Rate cuts in Europe combine to produce US optimism

Coming on the heels of the US Federal Reserve's half-point interest rate cut on Tuesday, yesterday's announcement by the European Central Bank and the Bank of England of similar cuts combined to produce optimism on Wall Street that this just might be the combination that finally does the trick to shore up global economies.

Stocks rallied in late morning trading as investors returned to equities on a day of heavy trading, with the stock market gaining momentum as short-term rates on fixed income investments fell. Battered financial stocks such as American Express and Citygroup rallied on the interest rate cuts.

Throughout the day, the Dow Jones Industrial Index traded above 9,606.5, the closing level of September 10th - the day before the terrorist attacks on America. Other major indices have already closed above pre-attack levels.

Analysts said the interaction of interest rate cuts, tax cuts and a planned $100 billion (€111 billion) stimulus package to be launched by the US Congress before the end of the year could combine to give a boost to the economy in the first half of next year. "The central banks in Europe are finally catching up with the US, and realising that fighting recession is more important than fighting inflation," said Mr Edgar Peters, chief investment officer of PanAgora Asset Management.

The markets were also encouraged by an unexpectedly optimistic forecast for the depressed semiconductor industry, which drove up the value of information technology stocks such as Intel and Cisco.

In its annual report, the Semiconductor Industry Association predicted that worldwide microchip revenue would grow 6 per cent to $150 billion in 2002, followed by 21 per cent sales increases in 2003 and in 2004.

There was evidence too that the US consumer was still spending - though in lower-end stores. Wal-Mart, America's largest retailer, reported a 6.7 per cent in same-store sales while consumers stayed away from high-end shops such as Federated Department Stores and Gap, which had significant declines in sales during October.

Also bucking the trend was the news that fewer Americans applied for first-time unemployment benefits last week. Initial jobless claims fell by 46,000 to 450,000 for the week ended November 3rd, the US Labor Department said. The figure for last week was also revised downwards from 14,000 to 11,000. The drop in weekly applications surprised analysts, who had predicted claims would increase to 513,000, according to a survey by Thomson Global Markets.

However, the number of people out of work reached its highest level in over 18 years. For the week ending October 27th, 3.72 million people received unemployment benefits, up from 34,000 the previous week and the highest level since April 1983.