Monday, November 24, 2008
European stocks surge after Citigroup bailout
LONDON (AP) -- European stock markets closed massively higher Monday, with investors buoyed by the bold rescue of Citigroup and the announcement of U.S. President-elect Barack Obama's new economic leadership team.
A fiscal stimulus plan in Britain also boosted sentiment.
The FTSE 100 index of leading British shares ended the day up 9.8 percent at 4,152.96, while Germany's DAX surged 10.3 percent to 4,554.33. The CAC-40 in France closed up 10.1 percent at 3,172.11.
In the United States, the Dow Jones industrial average was up 4.2 percent at 8,383.89.
Investors cheered the U.S. government's plan to take a $20 billion stake in Citigroup and guarantee billions of dollars of risky assets, even though it highlights the precarious state of the U.S. banking system.
"Equity markets have responded positively to the Citigroup news," said Neil Mackinnon, chief economist at ECU Group.
The surge also came ahead of Obama's choice Monday of New York Federal Reserve chief Timothy Geithner as the next treasury secretary, an appointment markets welcomed.
The news "has helped to reassure investors that a credible team is being charged with reinvigorating the economy," said John Higgins at Capital Economics in London.
"Now that the Obama economics team is taking shape, we should start to see details gradually emerge of a major fiscal stimulus of up to $500 billion, or 3.5 percent of gross domestic product," Higgins said.
However, he said this would still be insufficient to offset the broader economic downturn.
Analysts warned that strong stock rallies are likely to be only temporary during an economic crisis, and that a lasting rebound in equities is not near.
"You have to be mindful that these sorts of rallies at previous bailouts have been 24-hour wonders before the downtrend resumes," Mackinnon said.
Helping the stock rally in Britain was the announcement the government would cut the sales tax to 15 percent from the current 17.5 percent until the end of 2009 in an attempt to kick-start the economy ahead of Christmas. The cut will be effective on Monday.
The British Treasury also said the economy will shrink as much as 1.25 percent next year, but that a new 45 percent tax rate will be introduced in April 2011 for those earning more than 150,000 pounds ($225,000) a year, up from 40 percent currently.
While the news was positive for stocks, on the hopes a lower sales tax would support household spending, economists remained cautious.
"The government is right to implement a fiscal boost and a cut in the VAT should have at least some positive effect. But it is unlikely to prevent a severe recession in the UK economy and it certainly does not preclude the need for further sharp cuts in interest rates," said Jonathan Loynes at Capital Economics.
The news continued to be gloomy elsewhere in Europe, with recession fears mounting in Germany after a closely watched survey showed that Europe's biggest single economy is weakening at an alarming rate.
The Ifo Institute said its main business climate index fell to 85.8 points in November from 90.2 points in October. The last time it was that low was in February 1993.
Analysts said the data means that the recession in Germany, confirmed officially by government figures, will likely be deeper than many anticipate.
More economists now think that the European Central Bank may cut its benchmark interest rate next month from the current 3.25 percent by more than the half a percentage point it cut at its meeting in early November.
Asian markets were closed before their European and U.S. counterparts staged their rally. Hong Kong's Hang Seng index closed down 210.26 points, or 1.6 percent, at 12,457.94, while Australia's key index recovered from morning losses to close 0.3 percent higher.
South Korea's Kospi slid 3.4 percent to 970.14. Markets in Singapore, Thailand, India and Malaysia also fell.
In mainland China, stocks were down mostly in dismay that authorities did not announce an interest rate cut over the weekend as some investors had speculated. The Shanghai Composite index fell 3.7 percent to 1,897.06.
Oil prices followed equities in their rally in late European trading, with light, sweet crude for January delivery up $4.31 to $54.24 a barrel in trading on the New York Mercantile Exchange.
In currencies, the dollar was up against the yen at 96.39 yen, while the euro was traded higher at $1.2831.
(Copyright 2008 by The Associated Press. All Rights Reserved.)
