A very noisy dead cat bounce is one way to describe the way the local stockmarket rose today, or a relief rally. It was more the latter.
Australian shares rose 3%, or around 160 points, this morning, after the US Federal Reserve cut its discount rate overnight Friday and steadied markets in the US and Europe.
This morning was the turn of Australia and Asia and traders responded.
The All Ords and the ASX 200 index added around 160 points or so in the first two hours of trading to be up around 3% after Wall Street has rebounded strongly Friday after the US Federal reserve had cut its discount rate: that’s the rate it charges banks and other borrowers.
Macquarie Bank jumped sharply (in relief more than anything else) up 7.7%, the most since October 1997, at one stage before fading a touch to be 6.7% higher at $69.10 The investment bank revealed it had secured an $8 billion loan to help it in its restructuring the split into a bank and non bank holding company.
Our market had fallen a total of 5.8 percent in the previous four sessions last week.
Asian stocks also rose strongly this morning. Japan’s Nikkei 225 Stock Average climbed 3.4% in the first hour of trading and South Korea’s Kospi index jumped 4.3%.
The US S & P 500 Index rose 2.5% overnight Friday our time while the Dow increased 1.8%.
The Fed cut the rate at which it makes direct loans to banks by 0.5% to 5.75%, the first time it has cut borrowing costs between scheduled meetings since 2001. The more important federal funds target rate was left unchanged at 5.25%.
There won’t be a rate cut here and there will be no need for market economists and other urgers make whimpering little pleas for help, as their US counter parts are, such as this beauty from Goldman Sachs JBWere who told their Australian clients this morning:
Goldman Sachs is reverting to its previous forecast (held until early June) that the Federal Open Market Committee will cut its federal funds rate target by 75 basis points this year, starting with (at least) a 25- basis-point cut at (or possibly before) the September 18 FOMC meeting. The rationale is the sharp tightening in financial conditions over the past month, combined with an expectation that there will be some softening in the economic data over the next few weeks.
Well, after being forced the bail out its main hedge fund last week with $US2 billion and being forced to ‘eat’ tens of billions of US dollars worth of unwanted private equity offerings, Goldmans would say that. The losses it is facing on these in sold bonds and other dud deals are simply, very large. And a cut in the Federal Funds rate would save Goldman and the rest of Wall Street hundreds of millions of dollars. No wonder the tame economists on Wall Street are yodelling for a big rate cut from the Fed.
And its no wonder the call is just as strong from Germany where the Fed’s cut in its discount rate came too late on Friday to save the second small bank from bailout and near collapse because on unwise investment in subprime bonds.
The State-owned regional bank SachsenLB admitted on Saturday that it had to be bailed out to the tune of 17.3 billion euros (or $US29.5 billion, or $around $A36 billion) by Germany’s state savings bank system because of the US sub-prime loan crisis.
It’s the second bank to fall victim to dodgy subprime deals: IKB, a small listed industrial bank on the Ruhr had a total exposure estimated at $US24.9 bullion ($$A30 billion) in subprime securities which failed. The German banking system and its 38% shareholder, a German Government financial institution, put together a rescue package of more than $A6 billion for IKB.
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