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23 February 2024

Banks lead rebound in European shares ahead of Fed

By Agencies


European shares rose for the first time in four trading days on Tuesday, led by a rebound in financial stocks ahead of the Federal Reserve's interest rate decision.

HSBC, UBS and BNP Paribas rose 2.5-5 per cent, recovering some of the losses from Monday when financial stocks around the world were battered by the fire sale of Bear Stearns to JPMorgan.

By 0845 GMT the FTSEurofirst 300 index of top European shares was up 1.6 per cent at 1,218.85 points. The index fell 4.4 per cent on Monday to its lowest closing level in 2-1/2 years.

"The slump we had yesterday calls for a rebound, but I doubt it's sustainable simply due to the ... uncertainty in the financial sector and the response to what the Fed will do today," said FrankfurtFinanz strategist Heino Ruland.

"There are a couple of punters out there betting on a 100 basis point cut in base rates ... I doubt that would happen. I still believe 50 basis points is a safe bet, plus the 25 basis points (cut in the discount rate) that we saw on Sunday. They should keep their powder dry," he said.

The Fed is widely expected to deliver a steep cut in interest rates, which stand at 3 per cent, to shield the US economy from further damage stemming from the crisis in financial markets.

On the corporate front Lehman Brothers and Goldman Sachs report earnings.

The DJ Stoxx index of European banking shares was up nearly 2 per cent after having fallen by 6.1 per cent on Monday.


The FTSEurofirst 300 is still down about 20 per cent so far this year, and by over 25 per cent from last July's 6-1/2 year peaks as fear over fallout from the credit markets has hit banks' bottom lines and threatened consumer spending.

Financial markets show investors expect the Fed to deliver one of the steepest interest rate cuts since 1982 after the European market close on Tuesday, after unveiling a series of measures aimed at improving banks' access to liquidity on the money markets to unclog the financial system.

"The central banks are valiantly trying to restore liquidity in the financial markets and cauterise the wounds from the demise of Bear Stearns," said ING in a morning note.

"Sadly, there can be little confidence that this will remedy the interconnected problems that continue to plague the markets: contracting credit availability, asset price losses and uncertainty, burgeoning default risks and counterparty mistrust. With further bank asset write-downs about to be reported, the availability of credit will continue to be constrained," ING said.

Rio Tinto boosted the mining sector after Chinalco said it was more likely to raise its stake in the company than cut it. Shares in Rio rose 4.1 per cent.

Anglo American rose 2 per cent, while Vedanta Resources gained 2.6 per cent and Antofagasta rose 1.3 per cent.

Shares in German industrial conglomerate Siemens were among the top positive influences on the broader market, rising by more than 3.5 per cent to pare some of Monday's 17 per cent fall. This was the largest one-day decline in Siemens shares since entering the blue-chip DAX in April 1991.

In Frankfurt, the DAX rose 1.6 per cent, while Britain's FTSE 100 rose 1.7 per cent, helped by the heavyweight mining and oil sectors. France's CAC-40 rose 1.4 per cent.

A recovery in the price of crude oil to above $106 a barrel pushed up shares in BP and Total by 1.5-1.9 per cent.

Crude oil fell by more than 4 per cent on Monday in its biggest one-day fall since early August, fuelled by investment funds limiting their exposure to commodities in the face of deteriorating conditions in the global financial markets.

Also supporting the broader equities market was a tightening in credit spreads, indicating an easing in investors' nervousness, along with a 1.6 per cent fall in a measure of European options volatility, the first decline in this index in over a week.

Among losers was top German retailer Metro, which lost 2 per cent after reporting what traders said was a disappointing outlook and 2007 earnings per share. (Reuters)