Wednesday, October 08, 2008

Rescue plans and interest rate cuts fail to rally markets

Financial markets have failed to respond positively to cuts in interest rates and proposed rescue packages announced by the British government. Britain, the United States and Europe all agreed to cut interest rates by 0.5% but the move has failed to heighten confidence [BBC]. In Britain a rescue package amounting to £50 billion was announced by Alistair Darling early on Wednesday [BBC].
But despite early gains in trading the FTSE 100 declined later in the day closing at 5.2% down. In Europe stocks faired little better. The CAC 40 dropped by 6.1% while the DAX fell by 5.8%. In the US trading also saw a turbulent day. The Dow and the Nasdaq both saw losses, though the day’s trading has a few more hours to run. However, the biggest losses have been seen in Asia. The Nikkei saw its biggest drop in 21 years finishing 9.4% down [Bloomberg]. There was further bad news after another Icelandic bank was declared to be a liquidity risk. The UK branch of Kaupthing Singers & Friedlander was put into government administration after the Financial Services Authority determined it was unlikely to be able to meet its obligations to depositors [Daily Telegraph].

Besides cuts in interest rates in the West, China also announced it was cutting rates. The one-year lending and deposit rates will be lowered by 0.27 percentage point to 6.93 percent and 3.87 percent effective tomorrow [Bloomberg]. However there may be increased concern after China allowed a return to short-selling which many believe has been partly responsible for the continuing financial crisis [FT]. In the UK and the US a temporary ban on short selling was put in place to curb a practice blamed for allowing speculators to drive down the share price of financial institutions.

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