(Updates throughout after Fed cut)
By Ian Chua
LONDON, Jan 22 (Reuters) - A surprise 75 basis point
interest rate cut by the U.S. Federal Reserve on Tuesday failed
to shift sentiment in sour global stock markets, giving only a
temporary shot in the arm before they dipped back into the red.
The unscheduled policy easing knocked safe-haven government
bonds and the dollar off session highs.
The Fed slashed its benchmark federal funds rate to 3.5
percent, one week before its regular policy-setting meeting,
prompting U.S. short-term interest rate futures to price in up
to another 50 basis point worth of rate cuts for this month.
"The Fed has clearly emphasised the downside risks to growth
and felt it needed to counteract this with an immediate 75 basis
point move," said Matthew Sharratt, economist at Bank Of America
in London.
"We cannot discount the Fed will have to move further.
Whether this will be enough to fend off the headwinds in the
U.S. we will have to see."
European stocks <> rose over 1 percent in the wake of
the rate cut, before losing ground to be down 0.5 percent by
1420 GMT. But they remain off the session two-year lows.
The yen -- which tends to rise as investors unwind risky
trades -- retreated from a 2-1/2 year peak versus the dollar
<JPY=>.
"Central bank rate cuts are probably the only thing that
will temporarily give investors something to cheer about, at
least for a little while," said Anthony Muh, executive director
at AllianceTrust Asset Management.
The rate cut came too late for Asian stock markets, which
saw Japan's benchmark Nikkei <> drop 5.7 percent -- the
worst one-day loss since the session after the Sept. 11, 2001
attacks on the United States.
MSCI's main world stock index <.MIWD00000PUS> rebounded to
almost flat after the cut, before reversing again to be down 1.2
percent. But it remained well off an early 15-month low.
Last year's near 10 percent gain on the index was completely
wiped out late last week.
Many investors have anticipated a sharp correction as banks
around the world have announced billions of dollars of losses
linked to their exposure to defaulting U.S. subprime mortgages.
Worries that the subprime mortgage meltdown will spark a
recession lie at the heart of market concerns.
"It's a belated realisation that notwithstanding the cuts in
interest rates by central banks around the globe, those cuts are
not enough and that the underlying fundamentals are still
deteriorating and will continue to deteriorate for the
foreseeable future," Muh said.
Risk aversion has grown in tandem with fears of a U.S.
recession and fallout from the credit crunch which saw U.S. bond
insurer Ambac <ABK.N> lose its vital triple-A credit rating from
Fitch Ratings on Friday, putting at risk billions of dollars of
corporate and municipal bonds covered by the company.
"The crisis among monoline bond insurers has been a trigger
for this selloff late last week," said Marie-Pierre Peillon,
head of equity and credit research at Groupama Asset Management,
in Paris.
"The market has suddenly realized that if they collapse and
the dam breaks, we will see more provisions and writedowns from
a number of banks," she said.
SAFE HAVENS
Commodities rebounded with copper <MCU3> futures off a
three-week low on the London Metal Exchange but U.S. crude
<CLc1> oil prices slid nearly $3 to below $88 a barrel on
worries that slower global growth will sap demand.
Still signalling a sharp sell-off on Wall Street later, U.S.
stock index futures fell around 4 percent <SPc1><DJc1>. U.S.
markets were closed on Monday for a public holiday.
Flows to safe-haven government bonds slowed as stocks
recovered from early big falls. The benchmark U.S. 10-year yield
<US10YT=RR> rose above 3.5 percent, after earlier slipping below
that level to a 4-1/2 year low.
The 10-year Bund yield <EU10YT=RR> edged above 3.9 percent
after having slid to 3.78 percent -- levels last seen in late
2006.
Gyrations in the equity markets also left their mark on the
forex market, sending the Japanese yen sliding off a 2-1/2 year
high against the dollar <JPY=> and five-month peaks versus the
euro <EURJPY=>.
The dollar, while off highs, was still up 0.1 percent at
106.14 yen <JPY=> on the day, well off the low of 105.63 yen,
while the euro advanced 0.9 percent to 154.44 yen <EURJPY=>, off
the trough of 152.12.
The Fed cut has weakened the dollar against other
currencies. The euro rose 0.7 percent to $1.4546.
"With so much flux in the global markets, further volatility
in currencies is almost inevitable," said James Hughes, market
analyst at CMC Markets.
(Editing by Mike Peacock)
