KEY POINTS:
The lastest band-aid applied to the US economy by Federal Reserve Governor Ben Bernanke stemmed the flow of funds out of the stock market yesterday.
The 0.75 per cent rate cut - which takes the official cash rate in the US to just 2.25 per cent - steadied
nerves around the world .
Bernanke was aided - and possibly even upstaged - by good news from two major investment banks which delivered better than expected earnings.
The combined effect saw Wall St erase a two-day tumble that wiped out US$767 billion ($943 billion) following Bear Stearns' collapse.
Markets in New Zealand, Australia and throughout Asia followed suit.
The local NZX-50 exchange rose 1.4 per cent. In Australia the ASX-200 was up nearly 4 per cent.
Hong Kong's Hang Seng index and Japan's Nikkei surged back.
The New Zealand dollar jumped over 1 US cent yesterday as the ever widening interest rate differential saw carry traders piling back into the local currency. Last night the kiwi was buying US81.40c, up from its US80.25c close on Tuesday.
Dealers said there remained a good chance the kiwi would test the post-float high of US82.13c as confidence in the US dollar was ebbing with each rate cut.
The first quarter profit results from Goldman Sachs and Lehman Brothers reassured investors that two of the biggest investment banks in the world weren't about to follow Bear Stearns - at least for now.
"The run on the investment banks would appear to be over," said Doug Peta, a New York-based market strategist at J&W Seligman & Co, which oversees about US$19 billion. "It seems certain we are going to finish the week with the four investment banks we started with, and we couldn't be sure of that Monday morning. The Fed decision is actually a bit of a sideshow."
Goldman Sachs Group's first-quarter earnings fell by 50 per cent after recording more than US$2.5 billion of losses on loans and other assets, but resilient trading helped the bank exceed the market's low expectations.
Wall St's biggest investment bank by profits and market value, Goldman said net income fell to US$1.51 billion, or US$3.23 a share, in the quarter ended February 29, from US$3.2 billion, or US$6.67 a share, in the year-earlier period. Quarterly revenue fell 35 per cent to US$8.34 billion.
Turbulent markets, though, generated more revenue than expected from Goldman's mammoth trading business. Corporate bonds and mortgages were weaker, but trading in currencies, interest rates and commodities were at or near record levels.
The results beat analysts' average forecast of US$2.57 a share on US$7.3 billion of revenue, a bar lowered dramatically in recent weeks. "Goldman once again shines in difficult times. Times like these do separate the star performers," said Michael Holland, founder of Holland & Co, a money manager overseeing about US$4 billion. "This was a stellar report."
Lehman Brothers, the fourth-biggest US investment bank, also reported earnings that beat analysts' estimates and reassured shareholders that it has more than enough capital to survive.
Meanwhile, despite widespread market relief at the rate cut, concern about its inflationary effects is growing.
The Fed has lowered its benchmark overnight rate six times and the discount rate eight times since the middle of August, when the collapse of US sub-prime mortgages started to infect markets around the world.
The world's biggest financial companies have posted at least US$195 billion in writedowns and credit losses tied to American mortgage markets as of March 14.
The Fed has cut the benchmark lending rate by 2 percentage points this year, the most aggressive easing since the federal funds rate became an explicit target of policy in the late 1980s.
The decision follows a week of emergency actions by the US central bank, which has pushed its US$900 billion balance sheet into the front lines of market turmoil.
But there was dissent among the Fed board members. Dallas Fed president Richard Fisher and Philadelphia Fed president Charles Plosser voted against the decision.
"Relative to where inflation is running is where you begin to get the real tension between addressing the liquidity problems in the banks and the capital markets, and trying to encourage inflation to be under control for the long run," former Fed governor Susan Bies said.
"They are running very close, in this very high-inflation environment, to how much they can deal with."
"It could be they went to [75 basis points] rather than 100, trying to buy off some dissenters," said Lee Hoskins, former president of the Cleveland Fed.
"I'm disappointed ... They give a nod to inflation, but make no serious effort to target it."
FINANCIAL SURGE
* The NZX-50 closes up 1.42 per cent.
* The New Zealand dollar rises 1.15c to US81.4c.
* Markets rebound across Asia. Hong Kong's Hang Seng rises 2.3 per cent and Japan's benchmark Nikkei index gains 2.5 per cent.
* Australia's ASX-200 rises 3.99 per cent.
- AGENCIES
