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Last Updated: Saturday, 18 August 2007, 00:44 GMT 01:44 UK
US rate cut boosts global markets
Traders on the New York Stock Exchange
The Dow Jones recovered sharply after the Fed's move
UK shares swung firmly back into positive territory following the US Federal Reserve's move to cut the rate at which it lends to commercial banks.

The 0.5% cut, which will help to increase the flow of money in the US financial system, saw London's FTSE 100 jump 3.5% or 205.3 points to 6,064.2.

Relief was also felt in Wall Street, where shares opened sharply higher, and elsewhere in Europe.

At the close of trade in New York, the Dow Jones ended up 1.82% at 13,079.1.

The Nasdaq, which is dominated by technology companies, was also the recipient of a recovery of sentiment from deeply negative to tentatively positive. It was 2.31% ahead at 1,888.78 at the end of a chaotic week for global stocks.

Tighter credit conditions and increased uncertainty have the potential to restrain economic growth
US Federal Reserve Open Markets Committee

The Fed's eagerly anticipated action will make it easier for banks and mortgage lenders to access the emergency capital it has been pumping into the US financial system over the past few weeks.

This brought some calm to shares, which have been hit by concerns over the worsening credit outlook.

The intervention had an immediate positive affect on European markets, and the Frankfurt Dax closed 1.49% ahead before the weekend, while the Cac 40 in Paris jumped 1.86% higher.

All three main European indexes had veered in and out of the red throughout the day's trading.

On Thursday, London's FTSE 100 fell 4.1%, cutting almost 60bn off the value of Britain's top companies.

Wait and see

The root of the worldwide slide in share prices lies in the US mortgage market.

The problems centre on the sub-prime sector, which offers higher-risk loans to people with a poor credit history.

Which markets ended the week higher, and which lower?
London's FTSE 100: up 0.4%
Dow Jones: down 1.2%
S&P 500: down 0.5%
Frankfurt's Dax: up 0.4%
Tokyo's Nikkei 225: down 8.9%
Hong Kong's Hang Seng: down 6.4%

As US interest rates have risen and the housing bubble has burst, a growing number of sub-prime borrowers have defaulted on their loans.

Because the lenders have often sold on the debt, this has led to extensive financial difficulties for a number of investment funds with heavy exposure to the sector.

This, in turn, has prompted fears that the crisis currently contained in the financial markets could eventually spill over into real economic problems, like greater job insecurity, lower pensions and a flattening housing market.

Sentiment was not helped by the iconic US department store, Macy's, warning this week that fewer shoppers were walking through its doors. This followed bleak earnings forecasts from retail giant Wal-Mart and DIY firm Home Depot.

New York's Dow Jones index of leading shares has sunk almost 1,000 points, 6.5%, a month after reaching a record high of 14,000 on 19 July.

Fears linger that when trading resumes after the weekend, further losses could be seen as more financial institutions come clean and admit to the extent of their exposure to now worthless home loans.

Asian losses

While European shares received a boost from the Federal Reserve's support, it came too late to help Asian stock markets, which had earlier suffered heavy losses.

Japan's Nikkei declined 5.42%, its biggest points fall since April 2000, while Hong Kong's Hang Seng closed 1.38% lower.

The Bank of Japan injected 1.2 trillion yen ($10.7 billion; 5.4bn) into money markets, which was its third intervention of the week.

Japanese investors are worried that a slowdown in the US economy will hit exports from Asia.

There is also speculation that the Bank of Japan could raise interest rates next week, despite the problems on the market.

Elsewhere, the Australian central bank intervened to support its currency for the first time for six years.

The Australian dollar was facing its biggest one-day fall against the US dollar since it was allowed to trade freely in 1983.

The dollar has benefited from the financial crisis as investors sought a safe haven.


Dow Jones industrial average over 1 year

Graph of European share prices


FTSE 100
23.70 0.44%
19.54 0.34%
Cac 40
14.48 0.38%
Dow Jones
78.53 0.76%
35.31 1.58%
S&P 500
11.22 1.02%
BBC Global 30
20.65 0.36%
Data delayed by at least 15 minutes

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