Wall Street rallied dramatically yesterday on hopes that
the US Federal Reserve will deliver a shot in the arm to the American economy
next week with an interest rate cut.
The Dow Jones index finished the day up 230 points at 8,274. In London,
the FTSE 100 index of leading shares also rallied, closing up 134.6 at
4131.0. Major US investment banks are queuing up to forecast cuts in US
interest rates.
Lehman Brothers said yesterday it had seen "enough economic and financial
pain" and was changing its forecast. "The precise dimensions
of such a move are hard to pinpoint, but our main scenario is a quarter
point cut at the September, November and December meetings, pushing the
funds rate down to 1pc," said Lehman.
That would leave US rates at their lowest since the Depression era of the
1930s. Goldman Sachs also believes US rates could be cut next Tuesday,
when the US Federal Reserve's open market committee meets.
However, at 1.75pc, US interest rates are already at a 40-year low and
Peter Dixon, an economist at Commerzbank, said some traders were guilty
of wishful thinking yesterday. "There could be another cut in US rates,"
he said, "but I am not expecting one until October. You must remember
that this is August and markets are very thin."
Mr Dixon cited the US Federal Funds Futures contract, which is traded at
the Chicago Board of Trade. The contract for September was trading at 98.33
yesterday, indicating that no change is expected by a market that watches
the Fed's moves very closely. However, the October contract is forecasting
a cut.
The dollar also had a strong day against most major currencies as funds
flowed into the US stock market. The dollar's strength struck a blow against
the pound, which dropped sharply against the US currency in its worst day's
trading for more than five years.
By the close in London the pound had fallen 3 cents against the dollar,
to end at $1.5383. The dive came the day after National Statistics <http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2002/08/06/cnmanu06.xml>said
that manufacturing output had plunged in June at its fastest rate since
1979.
Some currency analysts said that although there is a growing view that
the US economy will suffer a so-called "double-dip" recession,
it could recover faster than the UK as the US authorities have taken swifter
action.
"Today's situation is because of the dollar and interest rates,"
said Ryan Shea of Bank One. "The US recovery will be quicker than
in the UK economy." The International Monetary Fund produced its latest
forecast for the US economy yesterday and said it expected growth to accelerate
from 2.5pc this year to 3.25pc next year.
However the trade-weighted index, which measures the pound against a basket
of currencies, showed it almost unmoved, dropping from 106.8 to 106.7,
as it gained slightly against the euro to 62.69p. The euro was also weak
against the dollar, slipping more than two cents to 96.43.
Today, the Bank of England releases its quarterly inflation report. The
minutes for this month's meeting of the monetary policy committee, when
rates were left at 4pc, will also be published.
Economists will be watching to see if Mervyn King, deputy governor of the
Bank, repeated his lone stance of July when he voted for a rate rise.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2002/08/07/cndow07.xml&s |