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European shares rebound on US rate cut

European shares rebounded strongly on Tuesday after the US Federal Reserve delivered a surprise hefty 75 basis points rate cut aimed at shoring up market confidence.

business Updated: Jan 22, 2008 20:50 IST

European shares rebounded strongly on Tuesday after the US Federal Reserve delivered a surprise hefty 75 basis points rate cut aimed at shoring up market confidence after worldwide global share market turmoil triggered by fears of a US recession.

The Fed's announcement that was it slashing its benchmark rate to 3.5 per cent led to a sharp fall in the dollar against the euro, a recovery in oil prices and a one-per-cent jump in Europe's blue-chip Stoxx 50 index.

The move to cut US borrowing costs came about an hour before the opening of Wall Street with the S&P future, a key pointer to the investor mood in New York, having slumped ahead of the opening of world's biggest stock market.

Analysts expected the Fed to deliver another cut at its meeting set down for January 29-30, with the general anticipation of a 50-basis points reduction.

The Fed's decision came in the wake of a global sell-off of shares amid fears that the sharp drop in world bourses could trigger an international economic crisis.

Investors have been on a roller coaster ride for much of Tuesday.

After a measure of stability appeared to return to European stock markets during late-morning trading, the news that another major US bank had reported a sharp fall in profits and big write downs as result of the American mortgage crisis sent shares tumbling again across Europe.

By early afternoon Europe's blue-chip Stoxx 50 index had slumped by 1.4 percent to 3095 points after Bank of America posted a 95-per cent fall in fourth-quarter earnings before climbing again after the announcement by the US monetary authorities.

Several national European stock markets had posted big falls in early trading, plunging by about 4.0 per cent as another round of dramatic falls across Asia again snowballed into Europe.

After posting a sharp fall Friday following the publication of a grim set of US economic data, the New York Stock Exchange was closed Monday for a public holiday.

Since Friday, however, many national stock markets around the world have been in free fall as fears have grown that the crisis in the American mortgage market would push the giant US economy into recession.

This, combined with the prospects of the fed trimming rates again also helped to undercut the dollar which slipped by 1.0 percent to just short of 1.46 against the euro.

However, with European markets having struggled Tuesday to find a floor after two days of heavy selling, European Central Bank chief economist Juergen Stark warned in a German radio interview that further downward corrections in share prices could still be in the pipeline.

In the meantime, governments around the world scrambled to reassure investors about the state of the economy with political leaders insisting that economic outlook remained sound.

But dealers said the market mood remained gloomy with Tokyo's Nikkei posting a 5.7 per cent fall Tuesday to close at its lowest point since September 2005 as worries that a strong yen would undercut the country's exports compounded the deepening sense of concern about the global economic outlook.

At the same time, while the stock market in Shanghai sunk 8.7 per cent, Hong Kong's Heng Seng index cascaded down 7.2 percent Tuesday and Sydney's All-Ords dropped 7.3 percent. Taiwan stocks plunged 6 per cent on Tuesday.

India's benchmark Sensex crashed by 12.48 percent Tuesday morning to record its biggest-ever single-day loss.

Trading had been suspended for an hour after the stock exchange lost 2,029 points, or 11.53 per cent, soon after it opened.