Fed announced an emergency rate cut of 75 basis points to 3.5 %

Banks slash rates as markets crash

John Morrissy, CanWest News Service

Published: Tuesday, January 22, 2008

OTTAWA_- With world stock markets reeling at the prospect of a sharp downturn in the U.S. economy spreading around the globe, the Bank of Canada and the U.S. Federal Reserve both slashed interest rates on Tuesday.

Before markets opened, the Fed announced an emergency rate cut of 75 basis points to 3.5 per cent. It also lowered the discount rate it charges on direct loans to banks by 75 basis points to four per cent.

Meanwhile, the Bank of Canada reduced its key lending rate 25 basis points to four per cent.

An Indian broker reacts while trading at a stock brokerage firm in Mumbai, January 22, 2008. Shares from Sydney to London sank for a second day on Tuesday, dragging commodity prices with them and promising similar falls for Wall Street as investors abandoned assets exposed to the risk of a global economic slowdown.

Reuters

News of the Fed rate cut failed to stave off sharp declines in U.S. stock markets, with the Dow Jones Industrial Average falling 302.80 points, or 2.47 per cent to 11801.54, by 9:51 a.m.

The Toronto Stocks Exchange rallied however, up 263 points to 12,395, after suffering a 600-point loss the day before.

The Canadian dollar rose 67 basis points to 97.48 cents US.

"Financial market conditions have deteriorated since October,"_the bank said in an accompanying statement, "leading to a tightening of credit conditions in industrial countries. Given this, and a deeper, more prolonged decline in the U.S. residential housing sector, the 2008 outlook for the U.S. economy is now significantly weaker" than forecast in October.

While the bank said it expects domestic demand to remain strong in Canada, it projects weaker growth in 2008 than previously forecast. It said it expects somewhat stronger growth in 2009. It has also slashed its inflation expectations, saying both core and total inflation should fall below 1.5 per cent by the middle of this year before returning to the two per cent target by the end of 2009.

"In line with this outlook, the bank has decided to lower the target for the overnight rate and further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to return inflation to target over the medium term."

The larger U.S. rate cut "is the first rate cut of this magnitude since Oct. 2, 1984, and the first inter-meeting cut to the fed funds rate since September 17, 2001 (just after 9/11)," said Eric Lascelles, chief economics and rates strategist for TD Securities.

"The magnitude of the action suggests that the Fed now treats both the economic and financial market conditions with a great deal of seriousness, and that the Fed was either well behind the curve or believes that the magnitude of the situation is the most serious in several decades."

The Bank of Canada move, one of the last by outgoing governor David Dodge, comes as a rout of global markets continued to dash value from stock values. The Nikkei stock average closed down 5.65 per cent and Hong Kong's Hang Seng index lost 8.65 per cent a day.

European markets recovered after falling more than 4.4 per cent, with the pan-European FTSEurofirst 300 index up 0.6 per cent at 1,287.92 points after the Fed's announcement.

The subprime mortgage market downturn, largely blamed for much of the global liquidity crisis, wreaked more damage Tuesday on U.S. bank earnings. Bank of America Corp, the second-largest U.S. bank, said on Tuesday that its fourth-quarter profit was hurt by more than $7 billion of losses tied to poor trading decisions and mounting credit woes.

Wachovia Corp. said profit fell 98 percent to its lowest since 2001 after write-downs for bad loans and mortgage-backed securities.

Oil markets were not spared as crude was off $3.31 to $87.26 as expectations of slowing industrial demand sent the contract for light, sweet crude for February delivery down $3.31 to $87.26 a barrel in electronic trading on the New York Mercantile Exchange by midday in Europe.

Shanghai copper and zinc futures fell by their four per cent daily limit as fears that the risk of a U.S. recession could eat into global growth

Market rout continues, while investors pray for big rate cuts

Market rout continues, while investors pray for big rate cuts

RTGAM

Investors appear to be praying for a little black magic from central banks to help staunch the tsunami of red ink rolling through global equity markets.
European markets, which had tanked again overnight, following Asia's lead, have recovered some of the lost ground on rumours of possible concerted action by central bankers.

Some strategists are theorizing that the Bank of Canada, which is due to unveil its latest interest rate setting at 9 a.m. (EST), may try to restart the Canadian stock market's heart by chopping a full half percentage point from its benchmark overnight rate, double the more standard quarter-point increment. There's also renewed speculation that the U.S. Federal Reserve Board may step in today with an unscheduled rate cut to try to stem the flow.

"It's rumour central," Mark Priest, a trader at TradIndex in London told Reuters. "We've heard rumours all morning. We've heard of a 75 basis point cut in the States (and) a co-ordinated cut by the Bank of England, Federal Reserve and the European Central Bank," he added.

"It's crazy that these markets all opened down 250-300 points and within an hour they're in positive territory ... Rate cuts are the only thing that are going to kick this market back up."

The rumblings about rate cuts scheduled or otherwise helped bring U.S. stock index futures back a touch, but they are still deep, deep in negative territory. This suggests, of course, that equity markets south of the border will plunge at the opening bell, catching up with the global rout that unfolded yesterday while U.S. investors were forced to stand on the sidelines for the Martin Luther King holiday.

At last count, the March futures contract on the Dow Jones industrial average was down 539 points or 4.4 per cent to 11,567, having earlier fallen as far as 11,456, while the S&P 500 contract is off 65.7 points or nearly 5 per cent to 1,259.6, up from a low of 1,255.3.
As for the March contract based on the Nasdaq 100, it is off 84 points or 4.5 per cent to 1,765.5, having earlier hit a low of 1,744.5.

"We're in a meltdown and it seems the global financial markets have gone mad," Peter Cardillo, chief market economist at Avalon Partners in New York told Reuters. "The only thing that could save this market is if [Federal Reserve Chairman Ben] Bernanke immediately cut interest rates by 100 basis points, perhaps that could reverse market psychology."

As for Europe, at about 8 a.m. (EST) the Dow Jones Euro Stoxx 40 was down 1.25 per cent, Britain's FTSE 100 was off just 0.2 per cent, and Germany's Dax was down a little more than 2 per cent.

But Asia had already finished another day of record losses. Japan's Nikkei 225 plunged 5.65 per cent, Hong Kong's Hang Seng 8.65 per cent, Shanghai's SE composite 7.2 per cent, Taiwan's Taiex 6.51 per cent and Bombay's Sensex 30 4.97 per cent.





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