Hints of Lower U.S. Interest Rates Lift Foreign Stocks
Stock markets around the world generally rose Monday in a rally buoyed by Federal Reserve Board chief Alan Greenspan hinting that the Fed may consider lowering U.S. interest rates. U.S. financial markets were closed for Labor Day.
Today global investors’ attention is likely to be riveted on Brazil to see whether a 50% hike in interest rates imposed late Friday will be enough to restore confidence in Latin America’s biggest economy and stem a headlong flight of capital that totaled an estimated $6 billion last week.
Greenspan’s remarks on Friday seemed to open the door to lower U.S. rates if the global financial situation continues to deteriorate and if U.S. inflation remains under control. The net effect was a welcome confidence boost for markets after a week of nervousness and bad news. Analysts said lower U.S. interest rates would give investors more reason to take on foreign investment risk.
“There is obviously a great sense of relief that the bias for tightening rates in the U.S. has been removed,” said Ian Williams, strategist at Panmure Gordon in London. But, citing the U.S. markets’ holiday, Wiiliams said he doubted there is a “whole lot of conviction” behind Monday’s rally.
Investors also noted the lack of a resolution to the political stalemate in Russia as another reason to temper the celebration over Monday’s rally. For that reason, many see no immediate end to the turmoil in global equities.
“[Monday] it was technical. After a lot of losses, there’s naturally a counter-reaction,” said a trader in Frankfurt. “It could continue for a few days. That’s my scenario.”
London’s stock exchange closed up 3.5% on Monday and Germany’s largest bourse, in Frankfurt, gained 1.6%.
In Asia, Japan’s benchmark Nikkei-225 stock average was higher in early trading today after adding 5.32% Monday for its second-largest point rise this year.
The widespread rally in Japan and in Asian stocks in general served to lift the yen to a four-month high against the dollar. The dollar fell as low as 130.50 yen, its lowest since April 24, from 133.57 late Friday in New York. The greenback also fell to its lowest level against the German mark since last November.
Elsewhere in Asia, Hong Kong’s Hang Seng index leaped 7.86% on Monday after the government moved to boost liquidity in the banking system. Malaysian shares, boosted by new government currency controls, shot up 22% and Korean shares gained 4%. Those results helped boost European shares, easing concerns about a widening global slowdown.
Stocks generally rose as well in Latin America, where last week the contagion caused by the Russian devaluation wrought havoc, prompting massive stock sell-offs.
“We reviewed our policies last week and decided it’s time to be a more aggressive buyer,” said Andres Ronchiatto, fund manager at Banco Quilmes in Caracas, Venezuela. “Some of these prices are very reasonable.”
The Mexican Bolsa index rose 4.9% Monday after three days of losses. Indices in Chile, Argentina, Peru and Venezuela also gained.
The Mexican peso continued to lose ground against the greenback, however, closing at 10.26 to the dollar, down from Friday’s close of 10.22. The peso has lost 15% in value over the last two months.
Colombia’s stocks were left out of the rally, however, falling 1.1%, as investors worried that the government’s tightening of the money supply late Friday would cause an economic downturn. Interest rates there rose Monday to 50% from 30% on Friday after the government acted to protect its currency in the aftermath of last week’s 9% devaluation.
Brazil’s financial markets were closed Monday for a national holiday and had not had a chance to react to the government’s action late Friday in which overnight lending rates were raised to 29.75% from the previous 19%. The rate hike will result in higher rates for consumer and business borrowers, but presumably will help to keep cash in the country.
“Now the foreign investor will rethink whether it is worth selling Brazilian debt at banana prices and the price of our Brady [bonds] will improve,” Francisco Lopes, the Central Bank’s monetary policy director, told the O Estado de Sao Paulo newspaper.
The Brazilian government acted after it spent $6 billion in foreign reserves just last week alone to protect its currency, the real, the Jornal do Brasil reported. Brazil has spent $18 billion of reserves since Aug. 1 to defend its beleaguered currency, the paper said.
The newspaper quoted President Fernando Henrique Cardoso as saying that foreign reserve losses forced the government to act in imposing higher interest rates, a measure that will be rescinded once foreign reserves are replenished. He reiterated that there are no imminent plans for a devaluation or other fiscal adjustments.
