Global sharemarkets reacted positively yesterday to the 0.75% interest rate cut by the United States Federal Reserve and some encouraging news from the troubled banking and insurance sector.
The Fed slashed key interest rates to 2.25% in an effort to hold off a deep recession and financial meltdown. The rate is the lowest since February 2005 and is expected to fall further this month or early in April.
Forsyth Barr broker Ken Lister said some US investment banks that were due to report had released results not as bad as market expectations.
The biggest reason for Wall Street's gain was Lehman Brothers' earnings. The market had been in fear about who was going to be next after Bear Stearns.
Goldman Sachs and Lehman Brothers posted lower quarterly earnings but both topped forecasts, reassuring investors that bank profits were intact despite the escalating credit crisis, he said.
‘‘This has calmed markets which have been volatile. Actions by the Fed may have stemmed the fallout in the credit market. The next few weeks could still be volatile but there are encouraging signals starting to emerge".
‘‘The market has had a hard three months. This can be seen as a relief rally.''
The New Zealand dollar also was firmer through the day.
As US interest rates fell, interest returned to New Zealand, where the official cash rate remained at 8.25%, a 6% gap with the US. The outlook of no cuts before the end of the year encouraged investors back into the dollar, Mr Lister said.
The blue chip Dow Jones Industrial average closed up 3.5%, the technology-rich Nasdaq closed up 4.2% and the FTSE-100 was up 3.5%.
At 5pm, the ASX-200 was up 3.4%, the Nikkei up 3.1% and the Hang Seng up 1.4%.
The NZX-50 closed up 48 points at 3467.26, 90-day bank bills were up 0.3% to 8.89% and the dollar rose US1.08c to US81.47c.
Mr Lister said the Fed's actions, combined with reports from Lehmans and Goldman Sachs had proved a shot in the arm for the banking and insurance sector.
However, there was still some uncertainty about the effect of the global credit crunch on the Australian banking and insurance sector.
The Fed, fearing financial markets would freeze up and send the economy into a sharp downward spiral, has offered cash auctions and direct loans to financial institutions, opening those liquidity avenues to Wall St firms beyond just the banks that normally deal with the Fed.
Despite a series of interest rate cuts and liquidity-providing measures, US economic activity has slowed sharply. Recent reports show a loss in jobs, reduced factory output and a drop in retail sales.
The US central bank has set aside lingering concerns on inflation arising from a jump in oil prices, some of which is blamed on the continuing deterioration of the dollar's value.
