The Hindu Business Line : Rebound hopes rise as Fed acts to contain sub-prime crisis

Mumbai, Aug. 18 While the global markets rallied after the US Federal Reserve cut the discount rates on Friday, analysts say that the impact of the sub-prime mortgage crisis may continue for some more time.

“The rate cut may have boosted the market sentiment, but it will not have much of a material impact in the US economy on the sub-prime side. However, the Fed’s indication that they are prepared to tackle any situation will give comfort to investors, which will be positive for emerging market equities,” said Mr Nilesh Shah, Deputy Managing Director, ICICI Prudential Asset Management Company.

Stocks in the US and Europe rallied on Friday after the US Federal Reserve unexpectedly cut the discount rate by half a percentage point to ease a credit crunch.

Crude oil, copper and gold advanced on reduced concern that the US economy, the world’s largest, would slow.

Three-month US Treasury bill yields rose because the need for Government debt as a safe heaven diminished, and the dollar fell against the euro for the first time in a week.

India impact

Mr Hemendra Kothari, Executive Chairman, DSP Merrill Lynch, said: “We will have to wait and watch for a couple of months to see the reality in the market.”

In India, banks have not been affected much by the sub-prime crisis. But the markets are so much integrated that global development will continue to have its impact everywhere, he said.

FIIs and hedge funds may cut their exposure in the emerging markets, but they will do it last in India, as fundamentals are strong in Indian equities, said Mr Shah.

“Barring domestic political uncertainties, Indian stock markets may react positively in the short-term. One can expect a 300-400 points rise in the key index on Monday,” said an analyst with a broking firm. “But a major concern is the stand-off between UPA and the Left parties,” he said.

Soon after the Fed announced the rate reduction, S&P 500 futures soared 3.6 per cent. Within 15 minutes, Europe’s Dow Jones Stoxx 600 Index was up 2.4 per cent. Credit-default swaps on the CDX North America Investment-Grade Index dropped 6 basis points to 72 basis points as the perception of US corporate-bond risk declined.

Stocks and corporate bonds reversed declines after the central bank said for the first time that a policy shift is needed to limit losses.

The Fed acted after its injections of cash into the federal-funds market in the past week failed to ease companies’ access to capital. While there were enough funds to drive the effective federal funds rate below 5.25 per cent, credit in other markets was scarce.

Europe’s Dow Jones Stoxx 600 Index rallied 2.2 per cent after falling as much as 1 per cent before the Fed cut. National benchmarks climbed in all 18 western European markets except Austria. The UK’s FTSE 100 added 3.5 per cent. France’s CAC 40 rose 1.9 per cent and Germany’s DAX climbed 1.5 per cent.

The Stoxx 50 increased 2.5 per cent, while the Euro Stoxx 50, a measure for the euro region, gained 2.3 per cent.

Meanwhile, crude oil for September delivery rose 98 cents, or 1.4 per cent, to $71.98 a barrel on the New York Mercantile Exchange.

Copper for delivery in three months advanced $270, or 4 per cent, to $7,010 a tonne on the London Metal Exchange. Gold gained $8.80, or 1.3 per cent, to $666.80 an ounce.

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