KEY POINTS:
Investors will be hoping the New Zealand sharemarket can follow Wall St's lead and rally today after the US Federal Reserve surprised the market by cutting its discount interest rate.
The Federal Reserve reduced the interest rate it charges banks during Friday trading in the US (Saturday morning
NZ time). It also acknowledged for the first time that an extraordinary policy shift is needed to contain the sub-prime mortgage collapse that has shaken global financial markets.
The Fed's decision ignited a rally in stocks from Europe to the US. The Standard & Poor's 500 index climbed the most in four years, rising 2.5 per cent, to 1445.94. The Dow Stoxx 600 Index of European shares added 2.1 per cent to close at 359.65.
The Fed cut the so-called discount rate by 0.5 per cent, to 5.75 per cent.
After it announced the rate reduction at 8.15am New York time, S&P 500 futures soared 3.6 per cent in 46 seconds.
In its announcement the Fed dropped language indicating a bias toward fighting inflation, and instead highlighted a rising threat to economic growth.
The discount rate is the interest the Fed charges for direct loans to banks, as opposed to the US official cash rate which is due for its next review on September 18.
But economists are now picking the Fed will also lower that benchmark rate when it meets next month.
On August 8 the Fed left the US official cash rate on hold at 5.25 per cent indicating that the inflation risk was still more serious than the economic risk from sub-prime fallout.
But in the past two weeks fears of a credit crunch have spread causing stock markets to slump around the world.
The NZX-50 shed 5.2 per cent last week. It is down 9.97 per cent since July 26, having shed $5.4 billion - more than eight months of growth.
The New Zealand dollar has also been hit hard as risk-averse carry traders bailed out of the currency.
The dollar has dropped from US80.7c on July 26 to US67.34c overnight on Friday.
The Fed's shift in emphasis from inflation to addressing the credit squeeze was not yet likely to be mirrored in the thinking of Reserve Bank Governor Allan Bollard, said UBS senior economist Robin Clements.
The local stock markets and the currency had been hit hard because they were exposed to international investors.
But at a fundamental level the New Zealand economy was not experiencing the kind of liquidity issues that were threatening the US, he said.
New Zealand's Reserve Bank had not yet had to inject cash into the economy to increase liquidity as had happened in the US and Europe, he said.
But it did warn on Friday that it was watching financial markets closely - a signal that it does see the situation as serious.
There were two ways the market could have reacted to the Fed's surprise move, Clements said.
One was: "Thank goodness they've done something."
The other was: "Oh my god, they've done something. The situation must be really bad."
Thankfully the market reacted positively, he said.
The rate move would ease pressure on mainstream lenders but it was unlikely to resolve the crisis at the most risk prone end of the sub-prime market, Clements said.
But while the move may not be enough to end the turmoil in the corporate and mortgage debt markets, traders and investors are betting that the Fed will cut the benchmark federal funds rate in September and then keep easing until the slump is over.
"They just woke up and smelled the coffee," said Gary Hindes, managing director at Deltec Asset Management in New York. "They're going to ease rates. They just set themselves up for it."
But US analysts are picking the markets will remain unsettled.
"The volatility is not over," cautioned Marc Pado, an analyst at Cantor Fitzgerald, adding "the market is probably going to struggle for another week or two".
EASING THE SQUEEZE
* The US Federal Reserve has cut its discount cash rate to take the pressure off debt markets
* It has indicated that economic worries in the US now outweigh inflation fears
* But New Zealand's Reserve Bank is expected to remain focused on inflation
* The global credit crisis has wiped 9.97 per cent - or $5.4 billion - off the NZX-50 index.
- additional reporting Bloomberg, Reuters
