fed rate cut

Oil firms and mineral extractors powered the top London index on Wednesday as investors welcomed a surprise half-percentage-point rate cut from the U.S. Federal Reserve.

The FTSE 100 indexshot up 2.9%, or 183 points, to 6,467.00, with the gains in line with those seen in other European share markets.

Oil firms and mining companies made strong gains as oil prices rose again, gold prices firmed and global economic growth prospects -- key for miners -- were underpinned by the move to cut rates by the Federal Reserve.

Shares of BP (BP) and Royal Dutch Shell (RDSA) rose more than 3% each, while Anglo Americanand Vedanta Resourcesshares increased more than 7.2% in the mining sector.

Crude futures were holding around $82 a barrel on Wednesday, while gold moved over $730 an ounce, buoyed by the Fed rate cut.

Fed cuts rates

Investors were considering the implications of the Fed's unexpectedly deep rate cut -- its first in four years -- made after the European market close on Tuesday.

Many strategists believe that the Fed rate cut makes it more likely that the Bank of England and the European Central Bank will also adjust their rate policy.

"Rate expectations are now falling across Europe," said Oliver Russ at Argonaut Asset Management.

The Bank of England's rate-setting committee voted unanimously to leave interest rates on hold earlier in September after judging that turmoil in the credit markets had left a more uncertain outlook on inflation, minutes of the meeting showed Wednesday.

Focusing on the U.K., European equity strategists at Bear Stearns said: "The countries most responsive to lower rates are the U.K. and Spain, where housing and construction have an above-average share of GDP and financials a large slice of the index."

Of home builders, Persimmonand Barratt Developmentshares advanced more than 5.1% each.

Financials moving higher in London on Wednesday included asset manager Schroders, up 6.9%, and hedge fund manager Man Group, up 6%.

Further, economists at ING said that the move by the Fed was likely to ease conditions in the credit markets.

"The unanimous decision to cut the Fed funds rate by 50 basis points was accompanied by a 50-basis-point cut in the discount rate, and so provides a more meaningful boost to the financial sector and added help to banks trying to finance conduits and special investment vehicles than any smaller cut would have delivered," they added.

U.K. banks with such vehicles include HBOSand Barclays (BCS) . HBOS shares rose 3.9%, while Barclays' shares increased 5.4%.

Mortgage banks up; Absolute Capital sinks

Most mortgage banks were also doing well as investors assesses rate expectations, with shares in Alliance & Leicesterup 3.3% and Bradford & Bingleyshares 5.9% higher.

However, shares in Northern Rockslipped 10.1% amid market speculation that it could be in line for a bid at a price below its current share price of 294 pence.

Of other companies in the news, shares in technology firm Smiths Grouprose 3% after it said a proposed joint venture with General Electric (GE) won't proceed.

"Smiths and GE were unable to agree on a strategic vision for the combined business," Smiths said.

"This is a disappointment, but could stimulate the break-up argument (for the firm)," said analysts at Numis Securities.

Outside the top index, shares in software and services group Misysjumped 9.4%.

The firm's comparable revenue rose 6% in the first quarter of its fiscal year, to 104 million pounds, mainly due to a stronger performance from its banking services division.

And shares of Absolute Capital Managementdropped 46.8% in afternoon trading after the group said seven of eight equity funds it manages are illiquid and that it was halting redemptions.

Co-Chief Investment Officer Florian Homm had resigned on Tuesday.
Sept. 19 (Bloomberg) -- Asian stocks climbed the most in a month after the U.S. Federal Reserve cut its benchmark lending rate by half a percentage point to bolster growth in the world's largest economy.

Toyota Motor Corp. climbed the most since May 2004, leading gains by companies that generate earnings in the U.S. Mitsubishi UFJ Financial Group Inc. and National Australia Bank Ltd. advanced on speculation the Fed's rate decrease will ease a credit shortage that has made financial stocks the world's worst performers this year.

``There's a good chance the U.S. will avoid a recession and that's behind this relief rally,'' said Leslie Phang, who helps oversee $1 billion at Commonwealth Private Bank in Singapore. ``Investors will be more confident taking on more risk.''

Hong Kong's Hang Seng Index closed above 25,000 for the first time, led by Sun Hung Kai Properties Ltd. after the city lowered rates in step with the Fed, spurring demand for property. India's Sensitive Index reached a record high.

The Morgan Stanley Capital International Asia-Pacific Index jumped 3.9 percent to 154.83 as of 7:11 p.m. in Tokyo, the biggest gain since Aug. 20. About 11 stocks rose for each that fell. All Asian markets climbed except China and Sri Lanka.

The Nikkei 225 Stock Average surged the most since March 2002, climbing 3.7 percent to 16,381.54 in Japan, where the central bank today keep its overnight lending rate at 0.5 percent. Canon Inc. and Honda Motor Co. advanced after the yen weakened against foreign currencies, raising the value of overseas sales.

Toyota, Samsung

The U.S. Standard & Poor's 500 Index yesterday climbed 2.9 percent after the Fed lowered its key rate to 4.75 percent from 5.25 percent. The reduction, more than most economists in a Bloomberg survey predicted, was the first cut in four years.

Most Asian currencies rose against the dollar, led by a more than 1 percent rise in the Indonesian rupiah, as the U.S. rate cut gave investors confidence to buy higher-yielding investments. Indonesia's Jakarta Composite Index added 3.3 percent.

Toyota, Japan's largest automaker, jumped 4.9 percent to 6,700, its steepest climb since May 2004. The company made 35 percent of its sales last year in North America. Samsung Electronics Co., South Korea's biggest company by market value, added 1.9 percent to 552,000 won. The company accounted for about 16 percent of South Korean exports last year.

Explosive Reaction

Australia's BHP Billiton Ltd., the world's largest mining company, gained 4.6 percent to A$40.44, a record. Taiwan Semiconductor Manufacturing Co., the largest maker of customized chips, added 1 percent to NT$61.40.

``Markets are reacting explosively,'' said Lee Wonki, who oversees the equivalent of $2.2 billion as chief executive of KB Asset Management Co. in Seoul. ``Stocks had been oversold, and then we had this bigger-than-expected rate cut.''

MSCI's Asia-Pacific index, following a July-August sell-off on concern the widening credit crisis would derail the global economy, is down 4 percent from July 24's record close of 161.40.

Of the past seven times the Fed has started a series of rate reductions, Asian stocks rose over the subsequent nine months on five occasions, Markus Rosgen, Citigroup Inc.'s Asian strategist said on Sept. 10.

Mitsubishi UFJ, Japan's biggest lender by assets, surged 6.1 percent to 1.05 million yen, its biggest gain in almost two years. National Australia Bank, the country's largest lender, gained 2.6 percent to A$38.20. ICICI Bank Ltd., India's second-largest lender, climbed 4.9 percent to 970.40 rupees.

Macquarie Bank Ltd., Australia's largest investment bank, jumped 5.1 percent to A$77.10. Macquarie said July 31 investors in two of its leveraged credit funds may lose 25 percent of their money because of the turmoil in credit markets.

Of the MSCI World Index's 10 industry groups, only financial stocks have declined this year on concern losses from U.S. subprime mortgages resulting in tighter credit conditions will hurt earnings.

Developers Benefit

Hong Kong's Hang Seng climbed 4 percent to 25,554.64, posting its biggest gain since Aug. 20. Sun Hung Kai Properties, Hong Kong's No. 1 developer by market value, climbed 6.3 percent to a record HK$123.20. Cheung Kong (Holdings) Ltd., the second biggest, added 7.2 percent to HK$128.60.

The Hong Kong Monetary Authority cut its base rate for overnight lending to 6.25 percent from 6.75 percent. The city's de facto central bank, which has tied its currency to the U.S. dollar since 1983, forms its base rate by adding 1.5 percentage points to the Fed's overnight lending rate. Lower borrowing costs spur demand for mortgages and property.

``In a falling-interest-rate environment, there will inevitably at some point be a requirement'' for local banks to lower mortgage rates, said Tahnoon Pasha, who oversees $2.2 billion as head of Asian equities at Manulife Asset Management in Hong Kong. ``A declining rate environment benefits developers in terms of the demand outlook for their products.''

Canon, Yen

Japan's exporters also gained after the yen weakened, boosting the value of overseas sales when converted into local currency. The yen traded at 115.87 to the dollar at the 3 p.m. end of stocks trading in Tokyo, from 114.89 at yesterday's close. The Japanese currency dropped to 161.97 against the euro from 159.16.

Canon, the world's biggest digital-camera maker, added 3.5 percent to 6,300 yen. Honda, Japan's No. 2 automaker, gained 3.5 percent to 3,890 yen. The company's annual operating profit gains about 13 billion yen ($112 million) for every 1 yen that Japan's currency weakens against the dollar, according to Koji Endo, a senior analyst at Credit Suisse Group in Tokyo.

Oil, Gold

Oil producers climbed as crude prices in New York traded above $82 a barrel. PetroChina Co., China's largest oil company, jumped 3.1 percent to HK$11.96 in Hong Kong. Inpex Holdings Inc., Japan's No. 1 oil explorer, rose 8.9 percent to 1.22 million yen.

Gold miners rose on the precious metal's advance to a 16- month high. Newcrest Mining Ltd., Australia's biggest gold mining company, climbed 6.7 percent to A$28.06. Zijin Mining Group Co., which runs China's largest gold mine, gained 6.9 percent to HK$10.48.

Cosmo Oil Co., Japan's fourth-largest refiner, surged 6.3 percent to 578 yen after it said it will sell a 20.85 percent stake to Abu Dhabi's state-controlled International Petroleum Investment Co. for 89.2 billion yen. The Middle Eastern nation will become Cosmo's largest shareholder.

H.I.S. Co., Japan's largest discount travel agency, slumped 14 percent to 2,160 yen. The stock tumbled after the company reported lower operating profit and JPMorgan Chase & Co. cut its share-price target.

TOKYO: The dollar bounced off a record low against the euro in Asian trade on Wednesday, recovering some of its heavy losses seen in the wake of the Federal Reserve's hefty interest rate cut, dealers said.

The euro slipped to $1.3966 in Tokyo morning trade from 1.3976 late Tuesday in New York where it hit a record high of 1.3988.

The dollar was steady at 116.04 yen after 116.05 while the euro dipped to 162.04 yen from 162.26.

The US central bank slashed its benchmark interest rate on Tuesday for the first time since June 2003, lopping off 50 basis points to 4.75 per cent to ease distress in credit markets and cushion the economy from the housing slump.

"The Fed showed clearly its responsibility towards the subprime mortgage problems that have spread across the world," said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank in Tokyo.

Although a rate cut could make the dollar less attractive to buyers because of lower returns on US assets, "the fact that on the contrary it is being bought signifies investor risk appetite is returning," he added.

The dollar initially fell against most currencies in response to the US rate cut, but managed to recover some ground in Asian trade as stocks rallied.

Dealers said the bold half-point cut had boosted demand for carry trades by investors selling low-return currencies such as the yen to buy high-yield currencies like the Australian and New Zealand dollars.

Markets are now speculating about the chances of further US rate cuts. "With US economic prospects not too bright and problems in the subprime mortgage market expected to continue for some time, there is a strong possibility that the Fed will continue to cut rates," said Muramatsu.

Investors will continue to scrutinise the results of major US banks this week to gauge their exposure to mortgage-backed assets. Positive third quarter financial results from Lehman Brothers Tuesday gave the market some relief.

The Bank of Japan was due to announce the outcome of its two-day monetary policy meeting at which it was widely expected to leave its key rate unchanged at 0.5 per cent given worries about the global economy and a credit squeeze.

Political uncertainties following the abrupt resignation of Prime Minister Shinzo Abe last week is also expected to deter the BoJ from hiking its super-low interest rates again yet.

"Political uncertainty, the global credit crunch and the continuing poor numbers from Japan are all deterring factors from expecting any change" in Japanese interest rates, GFT financial analyst Ian Copsey said. The Federal Reserve's move Tuesday to slash short-term interest rates by half a percentage point gave the financial markets a boost, lifting stock prices and lubricating credit markets that have seized up as subprime mortgages melted down.

That cut - the first since 2003 - was twice as big as many experts had anticipated.

But the Fed's action is less likely to have an immediate impact on the people at the root of the problem: borrowers struggling to pay their mortgages or hoping to refinance into more affordable loans.

Moreover, the rate cut adds fuel to worries that the Fed's efforts to bolster the financial markets could heat up inflation and force Americans to spend more on imported goods.

"This rate cut will obviously add liquidity to the financial markets and help banks, lenders and Wall Street," said Christopher Cagan, research director for First American Real Estate Solutions in Santa Ana. "But I don't think we'll see credit card rates dropping, or that all of a sudden the spigot will open and everyone will be making all those mortgages loans again."

Though the Fed fears the rate cut will fuel inflation, it indicated that it is more worried about the overall economy. Its immediate goal is to inject money into the banking system and ease the credit crunch that has spread beyond subprime loans, hobbling the housing market, roiling the stock markets and sparking fears of an international economic crisis.

To do that, the Fed

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lowered its benchmark federal funds rate, charged on overnight loans between banks, by half a percentage point to 4.75 percent. The Fed also cut the discount rate a half-point, trimming the cost of loans from the central bank to commercial banks to 5.25 percent.
In August, the Fed sought to reassure the markets and avert a systemic failure in the financial markets by throwing open the so-called discount window to provide banks with an inexpensive source of money so they could keep making loans.

Though some have urged the Fed to cut rates even further, the central bank offered no clues about whether it will do so, saying only "that some inflation risks remain, and it will continue to monitor inflation developments carefully." Still, it did not call inflation its "predominant policy concern" as it did after holding rates steady in early August.

"What it says to me is you had a major shift in the last couple of months from a Fed that was very concerned about inflation to one that is concerned about the health of the financial markets, the availability of liquidity," said Jerry Webman, chief economist at Oppenheimer Funds.

Wall Street's reaction to the rate cut was clearly positive. The Dow Jones industrial average soared 335.97 points, or 2.5 percent, to 13,739.39. That was the biggest percentage increase since April 2, 2003, and it nudged the index to within 1.9 percent of its record close of 14,000.41 in mid-July.

The rate cuts were especially good news for the financial sector, with Lehman Brothers Holdings, the largest U.S. underwriter of mortgage-backed bonds, vaulting 10 percent.

Similarly, the Standard & Poor's 500 index and the tech-heavy Nasdaq composite index rose 2.9 percent and 2.7 percent, respectively. Both scored their largest point gains since July 29, 2002.

In Silicon Valley, 95 of the area's 150 biggest stocks jumped at least 4 percent.

Asian stocks soared today in the wake of Wall Street's surge the day before. Japan's benchmark Nikkei 225 stock index jumped 3.2 percent in afternoon trading. In Hong Kong, the blue-chip Hang Seng index was up 3.8 percent.

On the other hand, there's a mixed picture for consumers. The dollar tumbled to a new all-time low against the euro after the rate cut, because lower rates make a currency less attractive to foreign investors.

Crude oil futures catapulted further into record terrain, rising 94 cents to $81.51 a barrel, and gold prices rallied to a multi-decade high. That's worrisome because rising commodity prices trickle down to average Americans and can dampen their spending power.

The rate cuts could lower the cost of borrowing for businesses and consumers, however. Bank of America, Wells Fargo and several other large banks followed the Fed's lead by trimming their prime lending rates that they charge their best borrowers, from 8.25 percent to 7.75 percent. That will make it cheaper for borrowers with good credit histories to take out car loans and home equity loans. It also will lower payments on some adjustable-rate mortgages and some variable-rate credit cards.

The problem is many adjustable-rate mortgages are based on indexes that don't move in tandem with the federal funds rate. The rate cuts also offer limited relief to borrowers who refinanced or stretched to buy homes using loans that initially charged artificially low teaser rates. Those borrowers are hurting because their loans are resetting to current rates.

In March, First American's Cagan projected that nearly one-third of teaser loans taken out in 2005 and 2006 will default. "For a lot of them, you could lower the rate a full point, and it wouldn't stop the defaults," Cagan said.