US markets rally on back of Fed rate cut and jobs data

After reflecting overnight that the US Federal Reserve's sixth interest rate cut this year was a harbinger of better times, and encouraged by the third fall in three weeks in jobless figures, investors returned to the US markets yesterday, driving up the Dow Jones industrial average and the tech-heavy Nasdaq index.

The rally was helped by news of the victory of Microsoft in its appeal against a court ruling that it should break up into two companies, with networking, telecom and chip stocks edging higher after the announcement.

The US employment situation continued to improve this month, according to Labour Department figures published yesterday, suggesting that the economy is still strong enough to absorb laid-off workers.

The number of Americans filing new applications for unemployment benefit for the week ending June 23rd declined by a seasonally adjusted 16,000 to 388,000, the lowest point since early May, according to the US Labour Department. The week before, new claims plunged by 31,000 to 404,000.

The fact that the Fed opted for a quarter-point rate cut on Wednesday rather than a half point as in the previous five adjustments was taken on Wall Street to signal that drastic measures were no longer needed to stop the economy sliding into recession and that it had entered a period of fine-tuning.

Analysts were wary, however, that the market may still be volatile and that any bounce may not survive another round of disappointing second-quarter earnings in the coming weeks. There still appears no end in sight to profit warnings which have already surpassed 600 this quarter, according to Thomson Financial/First Call.

The markets have yet to respond to the series of rate cuts, which began on January 3rd. At close of business on Wednesday, the Dow was down 3.3 per cent from January 3rd and the Nasdaq was off 16 per cent. The Standard & Poor's 500 index of Wall Street's most popular stocks had lost 8.3 per cent.

The downturn in trading has severely affected Wall Street investment banks which have lost business in investments, acquisitions and mergers. Two more big names on Wall Street, Prudential Securities and Credit Suisse First Boston's Pershing operation, announced lay-offs yesterday. Prudential is cutting 550 workers, or 3 per cent of its staff, and Pershing is cutting 123 workers, also 3 per cent.

This follows similar announcements from Goldman Sachs and Morgan Stanley last week, and Merrill Lynch on Tuesday. The latter has shed 3,300 jobs, or 5 per cent of its staff.

In May, US businesses eliminated 19,000 jobs, though the unemployment rate edged down to 4.4 per cent. California reported the biggest jump in new claims, up by 1,262 because of layoffs in the electronics and agriculture industries.