US and European share prices fell sharply again yesterday as the Fed's emergency rate cut on Tuesday failed to dispel fears that the US was sliding into recession.
European markets tumbled as investors' relief at the Fed decision proved to be temporary and on the back of a signal from the European Central Bank that there would be no cut in interest rates in the near future. Gloomy economic forecasts and fresh concerns about further bank writedowns also added to the sell-off of stocks.
The pan-European FTSE Eurofirst 300 index fell 3.2 per cent, London's FTSE 100 fell 2.3 per cent, the Dax index in Frankfurt tumbled 4.9 per cent, while the CAC in Paris was 4.25 per cent weaker. The Iseq followed the general trend, but managed to limit its losses to 0.11 per cent.
Dermot O'Leary, chief economist at Goodbody Stockbrokers yesterday wondered whether or not the Fed's move would be sufficient to correct the continuing market downturn. "With a fiscal package also on the way, US authorities are clearly trying their level best to avoid recession, but, given the time lags involved in these policy moves feeding through to the economy, it remains to be seen whether this will be enough," Mr O'Leary said.
UK equities failed to hold on to Tuesday's 2.9 per cent gain after the latest minutes from the Bank of England showed that its monetary policy committee voted to hold rates at 5.5 per cent by an eight to one majority.
But it was a different story in Asia as equity markets across the region gave a cautious welcome to the Fed's move. In Tokyo, the Nikkei 225 rose 2 per cent, while Hong Kong soared 10.7 per cent,
However, there was no respite for US equities yesterday as disappointing earnings forecasts from Apple and Motorola further undermined sentiment. By midday in New York, the S&P 500 index was down 1.9 per cent and heading for its a sixth successive drop - the worst losing streak since 2002.
Uncertainty about the outlook for US stocks drove the Vix volatility index - also known as Wall Street's "fear gauge" - to its highest since March 2003.
The turbulence in equity markets prompted a fresh flight to the relative safety of government bonds and pushed the yen higher as investors cut their exposure to risky carry trades.
Analysts said the markets were now expecting further action from the Fed next week after the unscheduled 75 basis point cut. Jens Nordvig at Goldman Sachs said the Fed would deliver another 50-point of easing at its January 30th meeting. "But we have kept the end-point for Fed funds at 2.50 per cent and we still expect that to be reached in the third quarter of the year although we recognise that there is now downside risk to this forecast."
David Rosenberg at Merrill Lynch said he believed the Fed needed eventually to get the funds rate back to 1 per cent. "This may sound aggressive, but Fed easing cycles in recessions almost always see the prior tightening cycle completely unwind.
"The serious nature of the current housing deflation and credit crunch environment makes the case for an aggressive easing in policy all the more compelling." -(Additional reporting, Financial Times service)
