December 12, 2007 / 1:48 AM / 12 years ago

Stocks fall as Fed rate cut disappoints

SYDNEY (Reuters) - Disappointment at the U.S. Federal Reserve’s modest 25 basis points cut in interest rates overnight sent Asian stocks sliding almost 2 percent on Wednesday, but government bonds surged as investors sought safe havens.

A street sign is seen on Wall Street outside the New York Stock Exchange in New York December 11, 2007. REUTERS/Brendan McDermid

Oil traded near $90 a barrel, buoyed by supply worries after a deadly Midwest ice storm briefly paralysed several big pipelines feeding a key U.S. crude storage hub, while gold steadied near $800 an ounce after falling on the Fed decision.

The U.S. central bank lowered its benchmark funds rate to 4.25 percent from 4.5 percent, disappointing many who had expected a bolder half-point move to help cushion the world’s biggest economy from a deep housing slump and tight lending conditions.

Falls in Asian stock markets mirrored a sharp decline on Wall Street, where the blue-chip Dow .DJI and tech-heavy Nasdaq Composite Index .IXIC both tumbled more than 2 percent. "The action on Wall Street was very much knee-jerk on the disappointment of not getting a 50 basis point cut. Investors will get over it, but for today at least it will be a case of following the negativity," said Craig James, chief equities economist at Commonwealth Securities in Sydney.

By the mid-session break, Tokyo's Nikkei average .N225 was down nearly 2 percent, while MSCI's measure of other Asia Pacific stocks shed 1.8 percent by 2:12 a.m. British time.

All the major markets in the region were down more than 1 percent with Hong Kong's Hang Seng Index .HSI sliding 2.3 percent in the first 15 minutes of trade.

The MSCI index is down about 9 percent from the November 1 peak, but still up 36 percent this year, outstripping a 11.5 percent rise for MSCI’s key world stock index.

But flight to safety helped propel Japanese government bond (JGB) prices sharply higher, sending yields sliding. The yield on the benchmark 10-year JGB dropped 7.5 basis points to 1.505 percent. Treasuries posted their biggest rally in more than three years on Tuesday after the Fed decision.

Some market watchers, who had looked for the Fed to underscore its concerns about weakening economic growth, were also caught offguard after the U.S. central bank did not offer its usual assessment of the balance of risks facing the economy.

FINANCIALS SLAMMED

Financial stocks bore the brunt of the selloff as worries about further credit-related losses flared up.

The sector had been lifted recently by hopes that cash infusions for some big firms such as UBS UBSN.VX would help them tide over ructions in credit markets.

Australia’s top investment bank Macquarie Group (MQG.AX) slipped 1.5 percent, South Korea’s Shinhan Financial Group (055550.KS) fell 3.3 percent and Japan’s Mizuho Financial (8411.T) lost 2.8 percent.

MSCI’s index of regional financial stocks lost 2 percent, underperforming the wider market.

Investors also dumped exporters or firms with large exposure to the U.S. economy, on worries about the health of the region’s top export destination as well as a weaker dollar.

Canon Inc (7751.T) slid 2.9 percent, Samsung Electronics (005930.KS) lost 1.8 percent, while shopping centre operator Westfield Group WDC.AX, which has about half of its shopping centres in the United States, shed 1.9 percent.

YEN FIRM

The yen held onto most of the gains made overnight with the dollar trading at 110.88 yen, well down from Tuesday’s high above 112 yen, while the euro bought 162.55 yen, off a peak near 165 yen reached in the previous session.

Investors tend to sell the low-yielding yen to fund purchases of riskier assets and reverse those trades in times of heightened risk aversion.

Against the greenback, the euro stabilised at around $1.4658 after having fallen from around $1.4750 on Tuesday on the back of the small U.S. rate cut.

Analysts say the dollar’s outlook is likely to improve with the Fed taking steps, albeit small ones, to cushion the economy from headwinds.

“The fact that the Fed is directly addressing economic strains, even if less swiftly than some had hoped for, supports a brighter outlook for the U.S. dollar,” said currency strategists at UBS in a note to clients.

Editing by Lincoln Feast

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