(Adds comments, updates prices)
By Pedro Nicolaci da Costa
NEW YORK, Jan 22 (Reuters) - The Federal Reserve's biggest
benchmark interest rate cut in over two decades stemmed a steep
slide in global equity markets on Tuesday, though U.S. stocks
still traded lower after Europe closed with solid gains.
The U.S. central bank sought to ease market worries after
dramatic losses the day before linked to fears of a spreading
U.S. recession and tight credit. It slashed key interest rates
by 0.75 percentage point to 3.5 percent, marking the first such
cut between regularly scheduled meetings since just after the
Sept. 11, 2001 terror attacks on the World Trade.
Bonds jumped sharply, with two-year notes falling to their
lowest in nearly four years, as investors prepared for still
more rate-cutting.
Investors remained skeptical whether the actions would be
enough to prevent a worsening U.S. economic outlook and a steep
retrenchment in corporate profits, even after U.S. equities
recovered sharply from the day's worst losses.
"It's the Fed coming to the realization the economy is
moving lower, quicker, (and) that the credit environment has
not been fully flushed out," said Joseph Battipaglia, market
strategist at Stifel Nicolaus. "It's not going to necessarily
turn this market around."
The Dow Jones industrial average <> was down about 90
points or 0.7 percent, while the S&P 500 <.SPX> fell 11 points
or 0.85 percent. But the market recovered from a much steeper
early selloff that took the Nasdaq down as much as 5 percent
and shaved 450 points from the Dow.
European markets, meanwhile, recovered sharply after wide
losses starting on Monday when U.S. markets were closed for the
Martin Luther King holiday. The pan-European FTSEurofirst 300
index <> ended 1.9 percent higher at 1,304.37 points,
snapping a five-day losing run.
"There is hope that the rate cut will help stabilize banks'
operational businesses," said Markus Steinbeis, head of
European equities at Pioneer Investments.
Markets worldwide were gripped by waves of selling on
Monday and early Tuesday which hit Asian equities particularly
hard. Hong Kong's Hang Seng index lost $321 billion of its
value in just the past two days.
"There's so much panic out there right now, I'm not sure it
(the Fed rate cut) will help," Kim Rupert, managing director of
global fixed-income at Action Economics in San Francisco as the
downturn hit markets.
Traders expect the Fed to cut rates even further at its
next scheduled policy meeting next week, leading to a big drop
in the dollar against the euro, as the prospect of much lower
rates in the United States made European assets look even more
attractive.
"Current events remain solidly dollar-negative," said Alan
Ruskin, chief international strategist at RBS Greenwich.
"Plainly, the Fed realized that to try stay ahead of the
market they had to act immediately. It smacks of panic."
Emerging market stocks also recovered from the extreme
selling of the prior session. Brazil's Bovespa surged 4 percent
as lower benchmark rates boosted the appeal of developing
countries' higher-yielding securities.
In energy markets, oil cut some of its losses to trade
around $89 a barrel on Tuesday after the Fed's action. U.S.
crude was trading at $89.30, down $1.21. Investors had been
gloomy in the oil patch that a sagging U.S. economy would cut
demand for energy.
(Reporting by Pedro Nicolaci da Costa. Editing by Richard
Satran
