A BIG US interest rate cut and better than expected results from two leading investment banks have buoyed markets and eased fears of a global credit crisis that could trigger a deep recession.
A day after the Dow Jones plunged on news of the near-collapse of Bear Stearns investment bank, the index closed more than 400 points up yesterday. Market sentiment was buoyed by a 0.75 per cent cut in the Federal Reserve's key federal funds rate and reported losses by Goldman Sachs and Lehman Brothers that were smaller than most analysts had predicted.
In Dublin, the Irish stock market recovered €1.8 billion of the €3.5 billion that was wiped off the value of the listed companies on St Patrick's Day. Overall, the Iseq index closed up 3 per cent.
Anticipation of the Fed's rate cut also brought some brave buyers back to equities during the afternoon session.
But one of the biggest stocks, Anglo Irish Bank, failed to reverse Monday's dramatic 15 per cent decline in its share price, as investors took a sceptical view on its exposure to troubled world property markets.
Equities dealers in Dublin described activity on the Iseq as choppy, stormy and volatile, with even the slightest rumours sending share prices tumbling.
Even the success stories of the day, such as a 9 per cent climb in the share price of concrete company CRH, were achieved on a low volume of traded shares, suggesting that there is no widespread vote of confidence in the market.
The reaction of European markets to the US central bank's move will be felt this morning.
Meanwhile, the dollar ended a four-day slump against the euro, mostly because the rate cut was a touch smaller than expected.
Most commentators expect downward pressure on the US currency to remain, however, intensifying difficulties for Irish exporters to the US.
The Irish Exporters' Association yesterday called on the Government to take action to help indigenous firms, which are also suffering because of weaker sterling.
"The Irish Government cannot afford to sit on the sideline on this issue," said John Whelan, the association's chief executive.
"Irish exporters are more exposed than our European neighbours, and positive action must be impressed on the European Central Bank to reduce the over-valued euro in the interests of stabilising the international trading system."
The UK accounts for 18 per cent of total Irish exports, or €16.4 billion of the total. Exports to the US last year were €15 billion, including exports by major Irish companies, and by Irish subsidiaries of US multinationals, Mr Whelan said.
Yesterday's interest rate cut, which brings the federal funds rate to 2.25 per cent, was a little smaller than anticipated but markets recovered quickly from an initial disappointment. Announcing the cut, the Fed said that, although it was navigating a difficult course in seeking to promote economic growth while maintaining price stability, it views the threat of economic weakness as a bigger current risk than inflation.
"Financial markets remain under considerable stress and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters," it said in a statement. The Fed has now lowered rates six times in as many months as a slump in the US housing market triggered a global credit crisis.
"Today's policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity," the central bank said.
US president George Bush said last night his administration would take whatever action was necessary to secure the health of the US economy, adding that prospects were less bleak than they appeared.
"In the long run, Americans ought to have confidence in our economy. I mean, there are some anchors that should promote long-term confidence," he said.
