European, US markets rebound on Fed move

NEW YORK: Stocks soared Friday after the Federal Reserve did what Wall Street was clamoring for and cut its key discount rate a half percentage point. The move quelled investors’ credit worries at least for the time being and sent the Dow Jones industrials up more than 130 points.

The Fed action came too late for Asian markets, which saw broad declines Friday. The UK’s benchmark FTSE 100 surged 3.11% to 6,041.20. France’s CAC 40 index rose 1.22% to 5,329.680 and Germany’s DAX index was up 1.26% to 7,361.540.

The Fed, which had resisted lowering rates despite weeks of market volatility, preferring to add nearly $120 billion in liquidity into the banking system instead, cut its discount rate to 5.75% from 6.25%. The Fed acknowledged that the stock market turbulence that pulled the Dow by hundreds of points a day was posing a risk to economic growth. “People were kind of baiting the Fed into doing something, and finally they did,” said Philip Dow, managing director of equity trading at RBC Dain Rauscher. “The playground monitor finally showed up, and it showed someone cares and someone is bringing rationality into the market.”

But the central bank made no mention of lowering its target for the federal funds rate, which has stood at 5.25% for more than a year. The fed funds rate determines the rates that banks charge each other for loans, while the discount rate only covers loans the Fed makes to banks. Many strategists believe the market won't settle down until the Fed lowers the fed funds rate target, considered a more significant benchmark.

If the market doesn’t get that rate cut, Friday’s gains may not stick — especially since it’s likely there will be plenty more news in the coming days and weeks of further troubles in the lending industry. Any mention of troubles at subprime lending companies, or fallout among funds that invested in mortgages, has sent stocks skidding. So have worries that tightening credit conditions were drying up the lending that has helped feed the wave of takeovers that sent Wall Street to new highs in the first half of the year.

Still, the Fed made it clear this wasn’t the only step it would take if the volatility continued. In its statement, it said, it “is prepared to act as needed.” In Brazil, stocks on Sao Paulo’s Bovespa exchange rebounded after two days of steep losses, rising 2.2% to 49,049. Earlier, in Asia, markets tried to buck the trend on early bargain-hunting, but then fell across the board. The Nikkei 225 index in Tokyo dropped 5.4% to end at 15,273.68, its lowest close in a year.

Hong Kong’s blue chip Hang Seng Index fell 1.4%, and the Korea Composite Stock Price Index lost 3.2% after dropping 6.9% the previous session. China’s shares, which had been hitting new daily highs recently, fell for a second day Friday. The benchmark Shanghai Composite Index ended down 2.3% at 4656.57 points, adding to a 2.1% loss the previous day. The Shenzhen Composite Index fell 1.6% to 1297.21.

In midday trading, the Dow Jones industrial average surged 137.05, or 1.07%, to 12,982.83. Trading was still volatile, though. The Dow shot up more than 300 points within the first 10 minutes of trading, but then lost more than half those gains. The blue chip index is still about 7% below its record close of 14,000.41 reached July 19, and is down about 2% on the week.

The Standard & Poor’s 500 index rose 21.04, or 1.49%, to 1,432.31, and the Nasdaq composite index rose 33.13, or 1.35%, to 2,484.20. Bonds slipped as stocks rose, with the yield on the benchmark 10-year Treasury note rising to 4.68% from 4.66% late Thursday. Traders who bet on how the Fed might alter rates were pricing in 100% chance that the central bank will lower the benchmark fed funds rate at its next meeting on September 18. Some investors are hoping for a cut in that benchmark rate even sooner.