Stocks extended their rally on Wall Street today after Asian and European markets rose sharply in the wake of the Federal Reserve’s decision on Tuesday to cut interest rates by half a percentage point.þþThe Dow Jones industrial average advanced 0.6 percent, closing at 13,815.56, up 76.17. The Standard & Poor’s 500-stock index and the Nasdaq composite index had registered similar gains. þþStocks soared on Tuesday after the Fed’s aggressive action, with the Dow and the S.& P. 500 both posting their biggest single-day gains since early 2003. That momentum carried over today into Asia, where leading indexes were pushed to their highest levels in more than a month, and into Europe, where the main indexes all rose about 3 percent.þþAnalysts attributed most of the gains to lingering enthusiasm from the rate cut announcement.þþ“I think that pretty much swamps everything else,” said William Rhodes, chief investment strategist for Rhodes Analytics in Boston.þþThere were some signs today that the risk of inflation — a possible byproduct of the Fed’s rate cut — was abating. The Consumer Price Index, which measures prices at the retail level, fell 0.1 percent in August, according to the Labor Department, though the core index, which excludes food and energy, ticked up 0.2 percent. A recent surge in oil prices to record levels could also increase future inflationary pressures. þþAnalysts said the new inflation figures were good news for the economy and, especially, for Fed officials. “Investors right now are looking past these record oil prices and looking at other economic data that appear to justify the Fed’s rate cut,” said Ryan Larson, senior equity trader at Voyageur Asset Management.þþThe Fed’s move appears to have glossed over a disappointing earnings report released by Morgan Stanley this morning. It reported a 17 percent drop in its third-quarter profit, including a $940 million write-down on loans made to finance acquisitions.þþThe Morgan Stanley report was in contrast to one from Lehman Brothers on Tuesday, which showed better-than-expected results. Investors are carefully watching the reports from the major brokerage firms this week. Goldman Sachs and Bear Stearns will issue theirs on Thursday.þþ“It’s kind of a mixed bag right now,” Mr. Larson said.þþ“We had Lehman positive yesterday, Morgan Stanley weaker today,” he said. “I think a lot of people are looking tomorrow for when Goldman reports. I think they’re going to have blowout numbers, so that will help.”þþBanking shares helped lead stocks higher in Europe, where all the major indexes showed sharp gains. The FTSE 100 in Britain surged 2.8 percent, the Dax in Germany gained 2.3 percent and the CAC 40 in France jumped 3.3 percent. Commodity stocks also surged thanks to higher metal and oil prices.þþIn Asia, the rate cut is seen as particularly benefiting exporters of cars and electronic goods that rely heavily on the United States market. The Toyota Motor Corporation had its biggest gain in more than three years on the Tokyo Stock Exchange, adding 4.9 percent. þþIn Seoul, Samsung Electronics and the Hyundai Motor Company, both heavily reliant on the United States market, were up 1.9 percent and 4.6 percent respectively, leading a surge in the share prices for exporters.þþBut the enthusiasm to cash in the American rate cut was tempered by a discomforting message implicit in the decision to drop the benchmark interest rate to 4.75 percent. þþ“I don’t think anyone can feel comfortable that all is well,” said Edmund Harriss, the investment director with Guinness Atkinson Investment Managers, which has $370 million in assets in three Asia-focused funds. On one hand, the move signifies that the Fed is “prepared to act as needed,” Mr. Harriss said, but on the other, the United States economy may be “looking weaker than we thought.” þþThe aggressive rate cut by the Fed has signaled to many economists the depth of concern about a possible United States recession brought on by a credit squeeze and declining consumer consumption.þþBut what effect will that have on Asia? Just two days before the Fed’s announcement, the Manila-based Asian Development Bank issued its annual economic outlook report for Asia, forecasting average growth in the region of 8.3 percent for 2007. This upgraded its earlier estimate of 7.6 percent. Growth for 2008 was forecast to be 8.2 percent. þþOne of the bank’s key messages was that Asia is well placed to manage any slowdown in the United States, although the comment came with the caveat that the outlook for the region in 2008 is “hazy” because of uncertainty in global financial markets and the health of the world’s biggest economy. þþ“Developing Asia’s defenses against external shocks are solid and it can weather a slowdown in the United States,” the bank said. “The region’s growth prospects will continue to depend on how well the countries address their internal challenges.” þþAt a conference in Manila today, Haruhiko Kuroda, the president of the bank, said the Fed rate cut would help stabilize financial markets and give a timely boost to the United States economy. þþ“It would definitely improve the prospect of sustained strong economic growth in the United States, which could be also very beneficial particularly for emerging economies in Asia,” Mr. Kuroda said. “So, I would say that the decision would be greatly appreciated by many economies, financial sectors in the region.” þþStill, other analysts were less sanguine about the effect of the rate cut. Christopher Lingle, a research scholar at the Centre for Civil Society, a think tank in New Delhi, said the Federal Reserve had “decided to refill the punch bowl,” encouraging loose lending practices. þþ“I think it’s a stupid idea, done by stupid people, to be polite,” Mr. Lingle said. “The Federal Reserve system has been engaged in one of the most ruinous monetary policies of the last century, starting with Alan Greenspan.” þþBefore Tuesday’s rate cut “some of the excess liquidity was trying to dry up, bankers were realizing that the party should be over and getting out before the hangover started,” Mr. Lingle added. þþFor Asia’s central banks there is sufficient uncertainty about the global economy that they are widely expected by economists to take a wait-and-see approach to any interest rate changes of their own. þþThe Bank of Japan decided today to leave rates unchanged, despite favoring a policy of incremental increases. Other central banks, like the Bank of Korea, are also likely to be cautious about going ahead with forecast rate rises, say analysts. þþToshihiko Fukui, the bank governor, said the decision to keep rates on hold was influenced by the downside risk for the United States economy and the potential effect on the state of the global economy, despite Japanese rates being low compared with the strength of the domestic economy. þþ“‘Uncertainty over the world economy has grown,” he said, according to Reuters. “We will make an appropriate policy judgment looking at economic data and risk, both at home and abroad.” þþMr. Harriss, the investment director with Guinness, said the rate cut might offer only a temporary reprieve. “Once the dust has settled, the concerns that have been there for a while still remain,” he said. þþ
Source: NY Times
