Emerging market rally lifts stocks, euro, oil

LONDON Thu Oct 30, 2008 8:29am EDT

1 of 4. People look at an electronic board displaying share prices at a securities company in Tokyo October 30, 2008.

Credit: Reuters/Yuriko Nakao

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LONDON (Reuters) - World stocks and the euro rallied on Thursday, boosted by sweeping gains in emerging markets after the U.S. Federal Reserve cut interest rates and opened swap lines to four developing economies.

The Fed slashed half a point off the fed funds rate to 1.0 percent and left the door open to further cuts, renewing weakness in the dollar but improving risk appetite as carry trade-favorite yen softened.

Japan and Germany also said they would plow billions of dollars into their economies, hoping to provide a cushion against a deep recession and complement a series of expected interest rate cuts.

"The Fed gave the market what it wanted and at the margin we're seeing more positive sentiment creeping back in. But underlying it all are deep-seated fears about global recession," said Nicola Chadwick, international economist at CBA.

The MSCI world equity index rallied by 3 percent, driven by gains of over 9 percent in the benchmark emerging equities index.

Emerging equities have bounced by nearly 22 percent from four-year lows set on Tuesday.

They got a further boost from the International Monetary Fund's approval of a short-term financing facility for emerging market economies that have a good economic track record but are having difficulties accessing credit. The Fed also opened up dollar liquidity aid beyond traditional markets, with four new $30 billion currency swap lines with Brazil, Mexico, South Korea and Singapore.

GDP EYED

An economic reality check is likely to come from U.S. third-quarter growth figures at 8:30 a.m. EDT, with economists expecting a decline for GDP of 0.5 percent.

Many see that as the start of a nine-month contraction, or possibly even longer.

"Widespread weakness across core economic sectors...are likely to reinforce expectations that the economy is at the start of a deep and prolonged recession," said Lena Komileva, G7 economist at Tullett Prebon in a note to clients.

The euro rose 1 percent to $1.3088 within a broad rally among higher-yielding currencies, but the U.S. currency gained 1.2 percent to 98.60 against the low-yielding yen.

The FTSEurofirst 300 index of leading European shares rose 2.1 percent, extending its rally into a third day, helped by rising commodity prices.

China, Hong Kong, Norway and Taiwan also cut rates in the past 24 hours, and pressure mounted on the Bank of Japan to reduce rates after it meets on Friday. Asian equity markets surged, with Japan's Nikkei average up 10 percent.

The European Central Bank and the Bank of England are also expected to cut rates next week.

But analysts cautioned that investors had taken the chance to go bargain-hunting, and markets remained volatile.

"This is a fantastic rally, but it is only a rally," said Justin Urquhart Stewart, director at Seven Investment Management.

"The rate cuts are encouraging. But we're dealing with a slump. It's not a matter of whether it's bad, it's a matter of how bad."

The euro zone's business climate indicator fell more sharply than expected in October to its lowest figure in seven years.

Highlighting the tough environment, Germany's BASF was the latest chemicals group to give a more cautious outlook for 2008 earnings as car makers and builders, its key customers, suffered in the global economic crisis.

Oil rose by $0.59 a barrel to $67.90, while euro zone government bond futures fell 48 ticks to 116.48, in line with weaker U.S. Treasuries after the Fed cut.

Emerging sovereign debt spreads, a measure of appetite for higher-risk assets, tightened by a hefty 47 basis points to 685 bps over U.S. Treasuries.

(Additional reporting by Simon Falush and Carolyn Cohn; Editing by Victoria Main)

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