GLOBAL EQUITIES enjoyed hefty gains yesterday as investors took heart from fresh signs of a thaw in the interbank lending market and further efforts by governments around the world to shore up the financial system.
In the money markets, the three-month dollar Libor rate tumbled 36 basis points (0.36 of a percentage point) to 4.06 per cent, the biggest drop since January, while the overnight dollar rate fell 16 basis points to 1.51 per cent - just above the Federal Reserve's target Fed funds rate of 1.5 per cent.
The spread of three-month dollar Libor over the Overnight Index Swap rates - a key gauge of banks' willingness to lend to each other - narrowed sharply to less than 300 basis points.
"If the corner has finally been turned for sky-high interbank rates, we could start to see rates collapse dramatically as central banks work overtime to siphon off the excess liquidity that they have pumped into the market these past two months," said Steve Barrow, head of G10 currency research at Standard Bank.
"As long as these trends continue in the money market, we are likely to see government bonds give back some of their recent gains, and we should see some recovery in higher-yielding currencies at the expense of the dollar and the yen."
Equities responded very positively to the better tone in the money markets. The pan-European FTSE Eurofirst 300 index jumped 3.3 per cent and the FTSE 100 in London leapt 5.4 per cent.
Wall Street got a further boost after Federal Reserve chairman Ben Bernanke said another fiscal stimulus package might be warranted, as he warned that US economic activity might be below its potential for several quarters.
Over the summer, the US government sent out about $100 billion in tax rebate cheques in a bid to stimulate consumer spending.
By midday in New York, the SP 500 was up 1.9 per cent, while volatility - as measured by the Vix index - eased further from last week's record level but remained elevated.
Asian markets rose across the board.
Despite the gains in equity markets, credit spreads widened in both Europe and the US. The European iTraxx Crossover index of mainly junk-rated credits hit a record wide of 787 basis points before narrowing slightly. The investment grade iTraxx Europe index also rose, although the CDX North America index retreated after an early rise.
In the currency markets as the dollar - seen by many in the markets recently as a haven amid the recent turbulence in the markets - extended its gains against the euro and sterling.
In commodities, oil prices struggled to maintain an early rally as investors awaited this week's Opec meeting at which a cut in production is expected to be discussed. November West Texas Intermediate was up 35 cent at $72.20 a barrel. - ( Financial Times service)
