Some relative calm returns

MANY stock markets rose yesterday and winners during the recent turmoil, such as the yen and gold, slipped as at least temporary calm returned to markets a day after coordinated global interest rate cuts.

Wall Street looked set for a solid start and European shares were 1.3 per cent higher, but off their highs. Badly hit emerging market shares as measured by MSCI were up 2.6 per cent.

Demand for government bonds, gold and low-yielding currencies all recent beneficiaries of investors searching for relative safety fell.

The direction of the moves was the mirror of what happened on Wednesday and earlier in the week, but nowhere near matched the degree.

MSCI's main world stock index, for example, was up 0.7 per cent. But it lost 3.9 per cent on Wednesday, 3.0 per cent on Tuesday and 6.1 per cent on Monday.

Yesterday's relative calm followed an unprecedented display of international coordination on Wednesday when the US Federal Reserve and central banks from Europe, Canada and China executed emergency rate cuts in the face of plunging global equity markets and the worst financial crisis in some 80 years.

"Markets are not turning positive, they are recovering from heavy losses that we saw earlier this week. The sentiment has not really improved," said Rik Zwaneveld, trader at AFS Brokers. "The rate cuts are a good step in the right direction to stop the bleeding, but this won't be enough."

Echoing this, Japan's Nikkei closed down, finishing 0.5 per cent lower in a choppy session and down for a sixth straight day for its lowest close since June 2003.

Against this background, governments and financial authorities were continuing to intervene.

The Bank of Japan made its biggest same-day money market injection since the credit crisis blew up, supplying a total of ¥4 trillion (US$40 billion).

Australia's central bank also lent US$10 billion in its US dollar repurchase auction. South Korea, Hong Kong and Taiwan cut interest rates.

Late on Wednesday, meanwhile, the European Central Bank said it would halve the premium banks pay for emergency borrowing over its main refinancing rate.

Analysts at Barclays reckoned the additional ECB measures in practise added almost a further 75 basis points in cuts on top of the official 50 basis point rate cut made earlier.

The various moves over the past few days helped ease some tension in interbank lending a crucial element of the credit crisis.

Steadying stock markets weakened demand for relatively safer assets. Spot gold was down 2.2 per cent at US$886 an ounce having gained around 8.5 per cent in the week to late Wednesday.

Reuters