Irish shares rally after interest cut

The Irish stock market rallied convincingly yesterday following the US Federal Reserve's decision to cut interest rates by half a percentage point and moves by brokers to convince institutional investors that its major stocks were undervalued.

The Iseq index of Irish shares outperformed the FTSE 100 and stock markets across Europe to close up 4.65 per cent, a climb of more than 350 points. Financial stocks fared even better with the sector ending the day 6.8 per cent firmer.

The positive mood, which followed the previous day's 1.4 per cent rise in the index, was largely due to Fed's intervention.

But the rally also followed an event on Tuesday organised by the Republic's largest stockbroker, Davy, where representatives from Irish financial institutions and banking sector analysts talked up Irish stocks' strong corporate earnings outlook, good asset quality and low valuations compared to their European counterparts.

As Northern Rock's share price sank again in London yesterday, it was a different story for AIB, which surged more than 8 per cent, with Bank of Ireland jumping almost 7.5 per cent and Anglo Irish Bank climbing by more than 6 per cent for the second day in a row.

Stockbrokers are hoping that there will be a reversal of fortunes for the Iseq, which is still down more than 15 per cent since the start of the year.

This is in contrast to other European stock markets up since the start of the year, despite the recent market volatility eroding some of the gains made earlier in the year.

Concerns about exposure to the slowing Irish housing market have added to the downward pressure on share prices sparked by problems in the US sub-prime mortgage sector in a stock market dominated by banking and construction companies.

But Davy is arguing that although Irish banks are in the bottom quartile across Europe in terms of their valuations, they are in the top quartile in terms of earnings, meaning their share prices could be viewed as being cheap.

A healthy volume of shares in the financials changed hands yesterday, with almost 7.9 million Anglo Irish Bank shares trading, and 7.4 million AIB shares and 6.9 million Bank of Ireland shares bought and sold.

In Britain, even one of the London market's best days of the year could not prevent a further fall for Northern Rock, with shares in the troubled lender plunging 16 per cent, taking losses since Friday to 60 per cent, as speculation mounted that Lloyds TSB and HBOS had made low-ball offers.

HBOS was rumoured to have pitched its approach at just 100p.

Northern Rock's poor performance contrasted the rest of the UK banking sector, where there were gains for most of the major banks. London's FTSE 100 closed 2.8 per cent higher.

Globally, stocks soared yesterday, while the dollar and sterling sank, in response to moves by central banks to ease tensions in international money markets.

The Bank of England also responded to liquidity problems by saying it would provide £10 billion that UK commercial banks can borrow for up to three months. The three-month interbank interest rate responded by falling to 6.55 per cent from 6.75 per cent.

On currency markets, the Fed's rate move drove the dollar to within a whisker of its record low against the euro of $1.3989.