Heaven help the world’s markets if the US Federal Reserve doesn’t cut interest rates again at its next meeting in four weeks’ time.

The Fed holds a two day meeting at the end of the month and there’s an overwhelming expectation of another cut in rate to follow up on the 0.50% cut of September 18. This Friday’s monthly employment numbers will play a part — as the surprise August fall did in the cut last month — but I wouldn’t bet on lightning striking twice.

Central bankers do not like the look of bailing out the financial sector from problems of its own creation.

That’s certainly an attitude held in Europe and you won’t see the Bank of England or the ECB blithely cutting rates at their meetings Thursday night, our time, simply to help the likes of UBS or Northern Rock. The two central banks have already done enough to help the financial sector and markets and so far the wider European economy seems to be holding up.

The rebound in US stocks, the fall in the US dollar, the re-igniting of the commodity boom (and its influence on Australia), suggests that the rate cut was directed at fixing up Wall Street, not the wider economy.

In Australia our dollar is now at 18-year highs at well over 89 US cents and probably will hit 90 US cents by the end of the week if the bulls keep running and the yen carry trade continues. The Reserve Bank won’t move on rates today but it could very well do so in November, a day after the Fed meeting and that will see the dollar rise even further towards parity.

US markets in particular now greet every piece of average to poor economic news (such as last night’s latest industrial production which showed the lowest manufacturing output in six months) with a standard reaction: “Oh, the Fed will fix that up by cutting rates”.

This attitude since the cut last month has seen Wall Street (follow Australia) in regaining the previous record of just over 14,000 points. The S&P 500 has risen 4.8% and the Dow 5.1% since the Fed cut. Even news from two of the world’s biggest banks, Citigroup and UBS, that they had written down the value of fixed income securities (such as subprime mortgages, credit derivatives, leveraged bonds and the like) by billions of dollars, failed to make people stop and think.

The optimists punted the shares higher, even though a few wise heads pointed out that the results reflected a lot of dented confidence, even after Citigroup went out of its way to tell the market it expected a normal fourth quarter.

US analysts had cut estimates for UBS and Citigroup since late August on concern about losses from mortgage-related securities and leveraged buyouts. UBS is paying for the billions of dollars of losses racked up in its Dillon Read banking operation on Wall Street.

The losses disclosed overnight exceeded most estimates but investors are speculating that the write-downs mean earnings won’t get any worse.

UBS, which is Europe’s biggest bank, cut the value of debt securities by more than four billion Swiss francs ($US3.4 billion), leading to a pretax loss of 600 million to 800 million francs in the quarter. Citigroup, based in New York, said third-quarter profit dropped 60% percent because of $US5.9 billion of credit and trading losses.

It seems there’s an adage in the making here: the bigger the bank the bigger the losses!

Even after the write-downs, UBS said it still was still carrying on its books more than $US19 billion of subprime residential mortgage-backed securities and almost $US4 billion of assets, such as warehouse credit lines and collateralized debt obligations that are backed by subprime loans.

UBS got rid of its investment banking head and its chief financial officer, who was an Australian, Clive Standish, who UBS said had ‘retired’. UBS is also sacking 1500 employees to cut costs. It’s pre tax loss was the first by any of the world’s major banks during the subprime mess.

The crisis has claimed a the small US online bank, NetBank which was shut and sold last friday night; two German banks have been bailed out and taken over while Northern Rock in Britain is struggling on with billions of dollars in life support from the British Government.

Citigroup Chief Executive Officer Charles Prince said statement the bank expects “to return to a normal earnings environment in the fourth quarter.” But analysts said the Citigroup write-downs had the signs of a huge clean up of bad and doubtful debts and other financial odds and sods.

Among the major cuts at Citigroup was $US1.4 billion in pre-tax write-downs on funded and unfunded leveraged loans and $US1.3 billion in pretax losses on the value of subprime mortgage-backed securities it had warehoused to repackage into collateralized debt obligations, and leveraged loans it had planned to repackage into collateralized loan obligation securitizations.