Record Election Day rally for stocks, credit thaws
NEW YORK (Reuters) - U.S. stocks had their biggest Election Day rally ever on Tuesday as investors looked forward to the end of the uncertainty surrounding the long fight for the White House, while global credit markets showed more signs of a thaw.
U.S. voters went to the polls to decide who will face the challenge of leading the world's largest economy out of its worst financial crisis in 80 years.
Polls close in parts of Indiana and Kentucky at 6 p.m. EST and over the following six hours in the other 48 states and the District of Columbia. [ID:nN04356344]
In the United States, the benchmark S&P 500 stock index rose 4.1 percent, to a four week closing high..
Europe's FTSEurofirst 300 stock index climbed 4.3 percent, and Japan's Nikkei rose 6.3 percent to a two-week high.
Global stocks, as measured by the MSCI World index, have risen 21.8 percent from their 5-1/2 year lows hit in late October.
Interbank lending rates fell to their lowest in five months as the sector tried to put the worst of the credit crisis behind it, but overnight deposits at the European Central Bank hit a record high, showing banks are still hoarding their cash.
The global credit crunch, which stemmed from a collapse in the U.S. housing market, has prompted banks to pull back lending to each other and to businesses and households for over a year now.
There were other mixed signals emerging about financing conditions, with issuance of commercial paper down for a third consecutive day on Monday. Companies use this short-term debt to fund their operations.
On Monday, the Federal Reserve said most U.S. and foreign banks had tightened lending standards across the board in the last three months.
Synchronized rate cuts by central banks and emergency government packages worth some $4 trillion may have prevented a banking sector meltdown, but the world economy is in poor shape.
New orders received by U.S. factories took a surprisingly steep tumble for a second month in a row during September, according to the U.S. Commerce Department on Tuesday.
In an attempt to deal with the economic slowdown, Australia cut interest rates sharply. Australia's bigger-than-expected 75-basis-point rate cut followed cuts in the United States, China and Japan last week. Britain and the euro zone are expected to follow suit on Thursday with half-point reductions.
"Each of the big developed economies now is either in a severe recession or well on the way," said Rory Robertson, interest rate strategist at Macquarie in Sydney.
Australia's central bank said there was significant weakness in major economies in explaining why it cut rates to 5.25 percent, the lowest since March 2005.
Similarly, the German economy will go through a weak spot in coming quarters, Bundesbank President Axel Weber said, before showing signs of brightening toward the end of 2009.
The banking crisis and global economic slowdown present a huge challenge for either presidential candidate in the U.S. elections on Tuesday.
Democrat Barack Obama leads Republican John McCain in five of eight closely fought states as polls opened, according to a series of Reuters/Zogby polls released on Tuesday.
Obama advocates a second economic stimulus package to revive the U.S. economy. Valued at $175 billion, the plan would include funding for infrastructure and a round of tax rebates.
McCain wants a $300 billion housing plan that would use some of the funds from the recent $700 billion Wall Street bailout package to buy up troubled mortgages.
The United States needs a new fiscal policy boost to complement aggressive steps taken by the Federal Reserve to shield the economy from a global credit crisis, one of its top policymakers said.
"There are limits to what the central bank can do. Our efforts must be complemented by fiscal policy," Dallas Federal Reserve President Richard Fisher told the Texas Cattle Feeders Association in prepared remarks.
EU PRESSES FOR REFORM
Meanwhile, EU leaders continued to press for an overhaul of financial market rules that were seen lacking as the current banking crisis spread around the globe, and German Chancellor Angela Merkel demanded world leaders agree quickly on a new framework.
"It mustn't take years, it must be done in months," Merkel said in Berlin.
On Tuesday European Union finance ministers backed proposals for a reform of the G8 club of major industrial nations and an end to the self-regulation in global financial markets that critics say caused the credit crisis.
British Prime Minister Gordon Brown and French President Nicolas Sarkozy want a "Bretton Woods"-style reworking of supervision of global capital markets.
Bretton Woods, a meeting of allied nations in July 1944, established a framework for regulating global money and finance after World War II.
Underscoring the widening effects of the credit crisis, German luxury car maker BMW abandoned its 2008 earnings forecast and cut production after a 60 percent plunge in quarterly profit.
On Monday, automakers reported that sales in the United States, BMW's biggest market, fell nearly 32 percent in October, to their lowest in more than 25 years.
European banks and insurers warned of tough times ahead.
UBS, Royal Bank of Scotland and reinsurer Swiss Re all said they face more writedowns of toxic assets or other losses because of accounting rules in the current quarter, and showed the financial crisis is causing more pain for consumers and businesses.
(Additional reporting by Reuters bureaus worldwide);
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