Shares charged higher on both sides of the Atlantic yesterday as hopes that the US Federal Reserve will underpin global financial markets with a cut in American interest rates next Tuesday soothed the nerves of shell-shocked investors.
The FTSE 100 index soared, registering its sharpest one-day percentage gain for three weeks, as it rose 146.6 points, or 2.4 per cent, to close at 6,280.7. On Wall Street, the Dow Jones industrial average closed up 180.60 points at 13,308.40, while European bourses also leapt.
However, Hank Paulson, US Treasury Secretary, gave warning that the crisis of confidence in credit markets is set to last longer than any of the financial shocks of the past two decades.
Speaking in Washington yesterday he predicted that turbulence was likely to be more prolonged than the crisis after the Russian government bond default in 1998 or the debt turmoil in Latin America in the 1980s. He said the uncertainty would be so extended because of the complexity of securities that have been traded.
The steep rally in shares came despite the failure of Ben Bernanke, the Fed’s Chairman, to give any clues to the US central bank’s intentions when he gave a lecture in Berlin.
The rally was also unchecked by further signs of persistent stresses in money markets, as the worldwide credit squeeze forcing leading banks to hoard capital continued to distort lending conditions.
In London, three-month Libor rates for loans between commercial banks rose for a tenth day running, to their highest since November 1998. Breaching the watershed level of 6.9 per cent, three-month Libor rates were fixed at 6.90375 per cent.
Nervousness over the economic impact of the credit crisis on the US hit the dollar, which sank to 15-year lows against a basket of leading currencies. The greenback’s losses pushed the euro as high as $1.3835, within a fraction of its record $1.3852 set on July 24, despite a move by the European Commission to downgrade its eurozone forecasts.
There was better news in money markets, with the European Central Bank (ECB), which has been pumping in funds to stabilise short-term rates, finding that it could drain ¤But
Leading policymakers again tried to ease investors’ anxieties. Jean-Claude Trichet, the ECB President, suggested that market conditions were being worsened because some institutions were not acting rationally.
“We need to restore confidence, as we have a paradox that there is a large number of high-quality assets which investors are currently treating as if they were not creditworthy,” he told the European Parliament’s economic and monetary affairs committee.
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