Greenspan sparks share records

America's leading stock markets chalked up huge gains on Tuesday, after US central bank chief Alan Greenspan dropped heavy hints that the next move in interest rates may be downwards.

Greenspan's comments were music to our ears

Michael Lyons, Dean Witter

The Nasdaq, favourite market of US technology shares, recorded its highest points gain and biggest percentage gain in market history.

The Nasdaq index gained 274 points or 10.48% to close at 2,889.76 - a much needed turnaround for a market that had lost nearly half its value since peaking in early March this year.

Blue chip stocks on the New York Stock Exchange were in a bullish mood as well. The Dow Jones Industrial Average, Wall Street's most watched index, gained 338.62 points at 10,898.72 - its third-largest points gain so far.

There was a knock on effect for stock markets in Europe, with London closing 2% higher and gains of about 3% being recorded in Paris and Frankfurt.

In addition to the rate cut hints from Mr Greenspan, the markets were also cheered by suggestions that the wrangling over the outcome of the US presidential elections may soon end, and by oil prices dropping to a four month low.

Slowdown in growth

Mr Greenspan's speech comes on the back of growing evidence that the US economy is slowing very significantly from the rapid growth rates recorded in past years.

That earlier super-fast growth was regarded by economists and Mr Greenspan as unsustainable - leading to a series of interest rate rises seeking to put the brakes on the economy before inflation reared its head.

But in a speech to a bankers' organisation in New York Mr Greenspan noted that the slowing down of the economy increased the risk from what he called 'untoward events'.

He also referred to the possibility that lower share prices and greater caution could lead to excessive softening in consumer and business spending.

Changing the bias

Mr Greenspan did make a point of saying that conditions in financial markets were not as difficult as they were two years ago, during the Far East economic crisis, when the Federal Reserve cut interest rates rapidly.

But investors welcomed the change of tone as implying that rate cuts are now higher up the Fed's agenda than further rises.

That would make it likely that the Fed will change its "bias" or preference for rate rises at its next meeting on December 19, sending a strong signal to investors.

This has lifted the stock markets because when interest rates are lowered, business costs are lowered so company profits may rise.

This helps companies to pay higher dividends to shareholders, while investments that pay interest become less attractive.

Michael Lyons, senior trader at Dean Witter, said: "Greenspan's comments were music to our ears."

Nasdaq records

In recent months, the Nasdaq market had taken a battering, shedding nearly 50% of its value since its peak in early March.

The gains posted on Tuesday were well above previous records.

The previous biggest points gain of the Nasdaq happened on 18 April this year, when it rose 254.41 points. On Tuesday it gained 274 points.

The most recent record for a percentage increase in a single day was set on 30 May this year, when it rose 7.94% - which looks paltry compared to Tuesday's 10.48% gain.