US rate cut fails to halt stock market jitters

A surprise last-minute cut in US interest rates failed to steady the world’s stock markets today in the face of growing gloom over a possible economic recession.

The American Federal Reserve chopped three-quarters of a per cent off a key funds rate just over an hour before markets opened there after a public holiday yesterday.

Analysts had predicted a severe drop on the Dow Jones following similar plunges around the world yesterday and today and it did fall on opening then rallied, with Wall Street uncertain whether the cut was sufficient.

Markets around the world were caught in the financial turbulence with Asian stocks falling on fears of recession in the US, while European stocks which started with a fall were down even after the US interest cut was announced.

By mid-afternoon Dublin's Iseq index of shares was up 3.7% to 6,492.41, the UK’s FTSE 100 was down 0.2% at 5,564.60, Germany’s DAX fell 2% at 6,655.96, while France’s CAC 40 was up 0.5% at 4,769.34.

“Its not a complete surprise, but the expectation was that it that would come at the next meeting. It’s difficult to anticipate what’s going to happen. There’s a slight element of nerves that comes in when the bank makes an emergency cut,” said Keith Bowman, an analyst at Hargreaves Lansdown stockbrokers in London.

The surprise Fed move was aimed at fears that trouble on financial markets from the US subprime crisis was spreading to the broader economy. Interest rate cuts tend to boost stocks.

European officials said their economies were positioned to weather the turbulence from the US. The European Union’s economic and monetary affairs commissioner, Joaquin Almunia, said that big US trade and budget deficits were to blame. “The main reason why the equity markets have this extreme volatile situation these days is the risk of a recession in the US, it’s not about a global recession,” he said.

Markets were sharply off in Asia, where Japan’s Nikkei 225 index nose-dived 5.7%, its biggest drop in nearly 10 years, to 12,573.05, a day after falling 3.9%. Australia’s benchmark index sank 7.1%, its steepest one-day slide in nearly 20 years.

Hong Kong’s Hang Seng index, which slumped 5.5% yesterday, finished down 8.7%. In China, the Shanghai Composite index lost 7.2% to 4,559.75, its lowest close since August.

Indian Finance Minister P. Chidambaram urged investors to remain calm after trading in Mumbai was halted for an hour when the stock market there fell 10% within minutes of opening. The Sensex rebounded some to close down 5% after plunging 7.4% yesterday.

“There is no reason at all to allow the worries of the Western world to overwhelm us,” Mr Chidambaram said.

Investors have dumped shares in frenetic trading the last two days on worries that the US economy, battered by a credit crisis and housing slump, will shrink in coming months, weakening demand for exports.

There is also scepticism that American authorities will be able to prevent a recession. The Federal Reserve has indicated it will lower interest rates further, and President George Bush has proposed an economic stimulus package that includes 145 billion dollars in tax cuts, but investors around the world are doubtful that the measures will lift the economy quickly.

“Unless we get some positive ’shock effects,’ such as drastic measures from the US government, there is almost no hope for a recovery in stocks,” said Koji Takeuchi, senior economist at Mizuho Research Institute in Tokyo.

Noritsugu Hirakawa, who monitors stock trading in Tokyo, said investors were frightened by the drastic falls on Chinese and Indian markets, the two emerging economies that are viewed as sustaining global growth even as the US economy sputters.

“The end to the slides in Asian stocks is nowhere in sight,” he said. “There is even speculation that China may be exposed to the US subprime mortgage crisis.”