(Updates prices, adds details)
By Pedro Nicolaci da Costa
NEW YORK, Jan 22 (Reuters) - The Federal Reserve's biggest
interest rate cut in over two decades cushioned a plunge in
global equity markets on Tuesday, but 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 and early Tuesday linked to
fears of a spreading U.S. recession and tight credit.
The Fed slashed key interest rates by three quarters of a
percentage point to 3.5 percent, marking the first such cut
between regularly scheduled meetings since just after the Sept.
11, 2001 attacks on the World Trade Center.
"It's the Fed coming to the realization the economy is
moving lower, quicker, 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."
In reaction to the Fed, bond prices jumped sharply, with
two-year notes falling to their lowest in nearly four years, as
investors prepared for still more rate-cutting. Bond prices
rise as rates fall.
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 significantly from the day's worst losses.
The Dow Jones industrial average <> was down about 132
points or 1.13 percent, while the S&P 500 <.SPX> fell 17 points
or 1.29 percent. But the market recovered from a much steeper
early sell-off 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, a sentiment that
fueled
a big drop in the dollar against the euro. The prospect of
much lower rates in the United States made European assets look
even more attractive as European finance ministers during the
day downplayed chances for a similar rate-cutting action by the
European central bank.
"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 over 4
percent as lower benchmark U.S. 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, which
traders hoped would bolster flagging demand. U.S. crude was
trading at $89.64, down 72 cents.
(Reporting by Pedro Nicolaci da Costa. Editing by Richard
Satran)
