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US shares make stunning recovery US shares make stunning recovery
(about 3 hours later)
US shares have made a remarkable recovery on fresh optimism over the US administration's ability to steer the country's economy out of a recession. US shares rebounded on Wednesday on fresh hopes that regulators will steer the US economy out of a recession.
All three stock market indexes erased deep losses earlier to end strongly ahead, with the Dow Jones rising 2.5% at 12,270.17. All three stock market indexes erased deep losses to end strongly ahead. The Dow Jones rose 2.5% at 12,270.17, while the Nasdaq turned around a 4% decline.
The rally was sparked by hopes that a government plan to rescue bond insurers will prevent huge credit losses. The rally followed news of a plan to bail out bond insurers, which lie at the heart of the financial system. They guarantee about $2 trillion of assets.
Earlier, European stocks fell. The UK's FTSE 100 was down by 3.9% at one point.Earlier, European stocks fell. The UK's FTSE 100 was down by 3.9% at one point.
Panic has swept through stock markets worldwide on fears that key global economies will enter recession.Panic has swept through stock markets worldwide on fears that key global economies will enter recession.
Relief rally
On Tuesday, the US Federal Reserve made its biggest rate cut for 25 years to stoke up growth and bolster markets.On Tuesday, the US Federal Reserve made its biggest rate cut for 25 years to stoke up growth and bolster markets.
However, worries persist that the move may have come too late, as many firms have already reported lower profits and a worsening business environment. However, worries persisted that the move may have come too late, as many firms have already reported lower profits and a worsening business environment.
Analysts said that stock markets would probably be volatile in coming weeks.
On Tuesday, the European Central Bank hinted it would not follow the Fed by slashing rates, and analysts said the Bank of England was unlikely to accelerate rate cuts.
Speaking to the BBC, billionaire investor George Soros said it was going to be difficult for the UK and US to avoid a recession, even after the Fed cut its main interest rate to 3.5% from 4.25%.
The markets are expecting a flood of profit warnings in the next few months Matthias Schellenberg,ING Investment Management. Chill on Wall StreetThe markets are expecting a flood of profit warnings in the next few months Matthias Schellenberg,ING Investment Management. Chill on Wall Street
"The uncertainty about corporate earnings growth in 2008 has risen, not only in the financial sector," said Matthias Schellenberg, managing director at ING Investment Management. Another major concern in the US has been the fear that bond insurers embroiled in the sub-prime crisis will not be able to cover their liabilities.
"The markets are expecting a flood of profit warnings in the next few months." This could force banks to write down further losses on investments backed by crisis-hit sub-prime mortgages.
This meant news of the government plan to inject capital into bond insurers gave fragile confidence in the financial sector a boost, and sent shares in banks, including Citigroup and JP Morgan surging, while technology firms also gained.
The technology-heavy Nasdaq rose 1%, while the wider S&P 500 index also ended ahead, up 2.1%.
But volatility is expected to persist in the coming weeks.
Market moversMarket movers
The UK's FTSE 100 index finished a nerve-wracking session 131 points, or 2.2%, lower at 5,609.3, erasing the gains it made on Tuesday. Earlier, the UK's FTSE 100 index finished a nerve-wracking session 131 points, or 2.2%, lower at 5,609.3, erasing gains it had made on Tuesday.
Germany's Dax lost 4.9% at 6,439.21, while France's Cac 40 was down 4.3% at 4,636.76.Germany's Dax lost 4.9% at 6,439.21, while France's Cac 40 was down 4.3% at 4,636.76.
Shares suffered after the European Central Bank hinted it would not follow the Fed by slashing rates, and analysts said the Bank of England was unlikely to accelerate rate cuts.
We consider the Fed's rate cut still insufficient for the global financial markets to completely recover and help the Japanese stocks to fully rebound Shinichi Ichikawa, Credit Suisse Bank boss warns of trialsSoros sees US recessionSend us your comments
"The uncertainty about corporate earnings growth in 2008 has risen, not only in the financial sector," said Matthias Schellenberg, managing director at ING Investment Management.
"The markets are expecting a flood of profit warnings in the next few months."
So far this year, the FTSE 100 has lost more than 13% of its value, wiping about £225bn off the total value of the companies listed on the index.So far this year, the FTSE 100 has lost more than 13% of its value, wiping about £225bn off the total value of the companies listed on the index.
Germany Dax's index has been one of the worst hit in Europe, down almost 20% this year.Germany Dax's index has been one of the worst hit in Europe, down almost 20% this year.
Werner Bader, a stock strategist at LBBW bank, put the falls down to the fact that German firms make most of their earnings overseas, particularly in the US.Werner Bader, a stock strategist at LBBW bank, put the falls down to the fact that German firms make most of their earnings overseas, particularly in the US.
"Dax companies are more exposed to the global economy because of their strong exports," he said."Dax companies are more exposed to the global economy because of their strong exports," he said.
Caution rules Inflation risks
Despite a late rally in stock prices on Tuesday and the positive session in Asia on Wednesday, investors were still being cautious. Despite slowing economic growth on both sides of the Atlantic, the Bank of England and the European Central Bank have insisted on the need to fight inflation, making extensive rate cuts unlikely.
"After digesting the news, markets have come to the conclusion that it will not resolve problems in the US economy," said Niels From at Dresdner Kleinwort. Bank of England governor Mervyn King said that the UK faced its toughest economic challenges since 1997, when the Bank gained independence from the government.
We consider the Fed's rate cut still insufficient for the global financial markets to completely recover and help the Japanese stocks to fully rebound Shinichi Ichikawa, Credit Suisse class="" href="/1/hi/business/7203571.stm">Bank boss warns of trials class="" href="/1/hi/business/7204159.stm">Soros sees US recession class="" href="http://newsforums.bbc.co.uk/nol/thread.jspa?forumID=4126&edition=1">Send us your comments European Central Bank (ECB) President Jean-Claude Trichet told the European Parliament in a speech on Wednesday that price growth was still the ECB's main concern.
"Caution still rules the long-term picture," added Markus Steinbeis of Boston-based Pioneer Investments.
Bank of England governor Mervyn King said that the UK faces its toughest economic challenges since 1997 when the Bank gained independence from the government.
Even so, with the Bank widely tipped to reduce rates to 5.25% from 5.5% next month, analysts are saying that more extensive cuts are unlikely.
This is because the Bank said the risk of inflation had "worsened markedly".
European Central Bank (ECB) President Jean-Claude Trichet also highlighted the risk of inflation during a speech to the European Parliament on Wednesday.
Mr Trichet said that price growth was still the ECB's main concern, and this outweighed the risks of slowing economic growth.
"In all circumstances, but even more particularly in demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility in already highly volatile markets," he explained."In all circumstances, but even more particularly in demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility in already highly volatile markets," he explained.
Recession fears
Some investors cautioned that the Fed's sudden, and sizeable, rate cut seemed like a panic decision.
They also questioned whether it would be enough to turn around a slump in the American housing market, signs of growing US unemployment and weakening consumer spending.
"The Fed's action provided a very positive surprise," said Tsuyoshi Segawa, strategist at Shinko Securities in Tokyo.
"But people are also starting to think that things may be so bad they needed to act."
Credit Suisse's chief strategist Shinichi Ichikawa added: "We consider the Fed's rate cut still insufficient for the global financial markets to completely recover and help the Japanese stocks to fully rebound."
Earlier on Wednesday, Japan's Nikkei 225 had closed up 2%, and Hong Kong's Hang Seng added 10.7%.Earlier on Wednesday, Japan's Nikkei 225 had closed up 2%, and Hong Kong's Hang Seng added 10.7%.
In the US, the Dow Jones closed on Tuesday 1.1% lower.