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Hopes that the US Federal Reserve will cut its benchmark interest rate fuelled a broad-based recovery across financial markets overnight Wednesday with some even predicting an "emergency" cut before the central bank's next scheduled meeting on September 18.
By the time European bourses closed, New York's benchmark Dow
Jones index was almost 100 points ahead. The FTSE 100 closed 109.9 points, or 1.8 per cent, higher, at 6196, France's CAC put on 1.6 per cent and Germany's Dax climbed 0.8 per cent.
A key indicator of the "risk premium" demanded by the markets, the Chicago Board Options Exchange Volatility Index, or VIX, has dropped 24 per cent since reaching a four-year high last Thursday.
More concretely, the mining giant Rio Tinto announced that it had no problem finding enough banks to buy the US$40 billion ($56 billion) in loans for the takeover of the Canadian rival Alcan. The eagerness of investors to buy into one of the largest debt offerings in the world will add to hopes that the worst could be over.
Elsewhere, though, the US mortgage crisis only deepened as Accredited Home Lendings, HSBC Holdings and Lehman Brothers Holdings all announced job cuts.
Housing-related job losses announced in the last week total more than 12,300.
The chairman of the Federal Reserve, Ben Bernanke, has said he will use "all of the tools at his disposal" to restore stability to markets rocked by the sub-prime crisis.
But nothing was heard from Bernanke himself while the Richmond Federal Reserve Bank president Jeffrey Lacker dampened hopes: "Financial market volatility, in and of itself, does not require a change in the target federal funds rate, in my view," he said.
In an odd twist the respected former chair of the Fed, Alan Greenspan, denied saying he would have cut the benchmark Fed rate by now.
The Fed has already lent more than US$100 billion to the market and reduced the rate at which it will lend directly to banks. Four American banks declared they had each borrowed US$500 million from this Fed discount window.
Citigroup said it was "pleased to inject liquidity into the financial system during times of market stress".
JP Morgan Chase, Bank of America and Wachovia have joined in a statement that they too had dipped into the facility, to the tune of US$500 million each.
The banks said: "The companies believe it is important at this time to take a leadership role in demonstrating the potential value of the Fed's primary credit facility and to encourage its use by other financial institutions."
Deutsche Bank is also believed to have tapped into the Fed.
Meanwhile, the European Central Bank announced an additional, longer-term, plan to support euro money markets, amounting to €40 billion ($76 billion). An accompanying statement added: "The position of the governing council of the ECB on its monetary policy stance was expressed by its president on 2 August 2007" - when Jean-Claude Trichet stated that "strong vigilance" against inflation was still needed.
- Independent