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European Markets Stabilize As US Stock Index Futures Rise

 
   By Martin Essex 
   Of DOW JONES NEWSWIRES 
 

LONDON (Dow Jones)--Europe's financial markets stabilized midmorning Tuesday as U.S. stock index futures suggested a recovery on Wall Street later in the day. Growing hopes of interest rate cuts also helped the markets regain their poise.

"One question we are being asked is will the Fed cut before the House gets to vote (on the bank bailout package)," said Paul Mortimer-Lee, global head of market economics at BNP Paribas.

"Our view is that they would very much prefer not to - it's rebuilding capital and extracting venomous assets that is needed to stabilize the financial system. A 50 bps cut now might turn out to be a shot into thin air. However, if we see another massive down on stocks today (Tuesday), maybe the Fed cannot wait for the politicians to get their act together and would have to move to try to stem the hemorrhaging of confidence," he added.

Mortimer-Lee believes a coordinated rate cut by the leading global central banks would have a much better impact on confidence than a lone cut by the Federal Reserve. "But will the ECB really cut for U.S. domestic reasons? We doubt it," he said.

In the markets, December Dow Jones Industrial Average stock index futures were up 2.1% at 10698 at 0925 GMT. December S&P 500 futures were up 2.8% at 1150.4

That helped European indexes to recover earlier losses. The FTSE 100 share index in London was up 0.2% at 4826.5 and the CAC-40 in Paris was also up 0.2% at 3962.3. But the DAX in Frankfurt was still down 0.6% at 5770.0.

In the foreign exchanges, the dollar was firm. The euro slipped to $1.4375 from $1.4435 in late New York business Monday. And the dollar climbed to 105.06 Japanese yen from 104.17.

"Financial contagion risks are building. The sharp declines in G7 high-yield (currencies)... as well as emerging local currencies... suggest a sharp drain in global liquidity on repatriation flows," said Lena Komileva, head of G7 market economics at Tullett Prebon.

Elsewhere, December bund futures were trading at 115.31 at 0935 GMT, down 0.56, while December U.K. gilt futures were trading at 112.46, down 0.24.

"Financial markets are likely to remain in a precarious position," said Barclays Capital in a research note.

"Equity and credit markets are very vulnerable, while liquidity conditions in term money markets remain dire, even after the dramatic expansion of the Fed's swap lines with foreign central banks yesterday (Monday).

"In addition, investors are becoming increasingly concerned about the likely spillover from the financial market turbulence to global growth, reflected in the sharp selloff in commodity prices and commodity-related stocks yesterday," BarCap added.

November Brent crude oil futures were trading at $95.56 per barrel at 0940 GMT, up from $93.98 in late New York business Monday. November Nymex light futures were trading at $97.93, up from $96.37. Spot gold was at $898.40 per ounce, down from $906.00.

-By Martin Essex, Dow Jones Newswires; +44 (0) 20 7842 9464; martin.essex@dowjones.com

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(END) Dow Jones Newswires

September 30, 2008 05:52 ET (09:52 GMT)


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