European markets post modest rally

[October 17, 2008]  LONDON (AP) -- European stock markets were modestly higher Friday after Wall Street rebounded strongly overnight and Japan's Nikkei recovered from its historic fall in the previous day's session.

The FTSE 100 index of leading British shares was 42.03 points, or 1.1 percent, higher at 3,903.42, while Germany's DAX was up 11.38 points, or 0.3 percent, at 4,634.19. France's CAC-40 was up 37.28 points, or 1.2 percent, at 3,218.28.

Even though stock markets were up Friday, traders remained nervous after an extremely volatile week when massive gains on Monday and Tuesday were mostly erased in the following two sessions. That volatility was evident Thursday on Wall Street where a late wave of buying lifted the Dow Jones index 4.7 percent to 8,979.26, a swing of more than 800 points over the day. The Dow remains up 528 points, or 6.3 percent, for the week.

"Equity markets remain in something of a quandary as we approach the weekend break, with traders struggling to determine just how much additional value can be deducted regardless of the outlook for the global economy," said Matt Buckland, a dealer at CMC Markets.

"Whilst this dilemma continues, it seems as if the volatility we've seen of late will struggle to fade and it's also going to be difficult to call an end to these choppy market conditions," he added.

Much of Friday's session may depend on U.S. housing starts data later. The decline in the housing market has affected nearly all sectors of the economy, causing unemployment to rise, consumers to cut back on spending and the credit market to seize, sending the stock market plunging.

The long-term key is whether the flurry of activity by governments over the last week or so can actually break the logjam in credit markets. Despite the coordinated interest rate reductions announced last week, and massive liquidity boosts, the rates at which banks lend remain abnormally high, despite some easing in rates and spreads this week. That could in turn make it harder for businesses and consumers to get the credit they need and hurt the economy.

The Hong Kong interbank offered rate, known as Hibor, for three-month loans fell declined to 4.19 from 4.35 percent, its biggest drop in nearly a month.

Though the rescue packages have helped alleviate the pressures on the banking system, they will do nothing to prevent a serious economic slowdown.

"Even if the financial maelstrom may be about to abate it is not over," said Russel Jones, global head of fixed income and currency strategy at RBC Capital Markets.

"A serious global recession is 'baked in the cake' and this is bound to mean that there will be further pulses of risk aversion, further traumas for financial sectors and markets, and acute pain both for corporate sectors and for individuals," he added.

Concerns about the global economic outlook have taken their toll on the oil price, which fell Thursday to a 14-month before rallying just over a dollar this morning to $70.97.

The fall in the price of oil has weighed on markets in Russia, where indexes continued their losing streak on Friday, with the MICEX dropping 6 percent and the RTS down 4.7 percent by 1:30 p.m. (0930 GMT).

Earlier, Tokyo's Nikkei 225 stock average advanced 235.27 points, or 2.78 percent, at 8,693.82. The index was still far from recouping Thursday's 11.4 percent loss -- its biggest one-day percentage drop since the stock market crash of October 1987. For the week, the Nikkei gained 5 percent, much better than the 24 percent it lost last week.

Compared to the gyrations earlier this week, Asian markets were moderately more stable.

Shanghai's index rose for the first time in a week. But Hong Kong's Hang Seng index dropped over 4 percent to 14,554.21, its lowest level in almost three years as selling accelerated late in the day after banks said they would help investors in Lehman Brothers-backed bonds recouped some of their money. Australia, Singapore and South Korea also closed lower.

Governments across Asia remained focused on the financial crisis. Late Thursday, Malaysia said it would guarantee all bank deposits for the next two years, following similar moves by Hong Kong and Singapore amid fears about the health of banks.

In Australia, Prime Minister Kevin Rudd gave a reassurances that the country would pull through the crisis "in good shape. He said he would soon present a proposal in response to the crisis that would include a review of executive pay at financial institutions.

With crisis and recession talk still weighing heavily, Japan investors bought targeted sectors such as utilities and telecommunications, whose earnings are considered somewhat insulated from global downturns. Nippon Telegraph and Telephone Corp. soared 9.82 percent and Tokyo Gas Co. jumped 5.85 percent.

In currencies, the dollar declined to 100.65 yen from 101.30 yen late Thursday. The euro was down at $1.3433 from $1.3492.

[Associated Press; By PAN PYLAS]

Associated Press Business Writer Jeremiah Marquez in Hong Kong AP Writer and Tomoko A. Hosaka in Tokyo contributed to this report.

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