Investors weighed up on Wednesday the prospects of a near-term U.S. rate cut to calm a financial storm stemming from America's faltering home loan sector, as the European Central Bank moved to soothe money markets again.
Indicating liquidity problems were far from over, the ECB said it would hold a tender to add 40 billion euros in 91-day funds to the euro money market on Thursday -- a technical measure aimed at supporting the normalisation of the market.
In a statement, the ECB said its monetary policy stance was expressed by President Jean-Claude Trichet on August 2, suggesting it had not changed its plans for interest rates.
Including that sentence suggests to us that the council continues to view the chances of a rate increase in September as high, said Jacques Cailloux, economist at RBS.
U.S. shares rose on hopes of a Federal Reserve rate cut but there were mixed messages about its intentions, following last week's half-point cut in the rate which governs its loans to banks, a move which helped battered stock markets stabilise.
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Speculation the Fed might cut its benchmark interest rate soon was fired by Senator Christopher Dodd, chairman of the U.S. Senate Banking Committee, who said Fed Chairman Ben Bernanke had told him he would use all available tools to calm the markets.
Dodd met Bernanke and U.S. Treasury Secretary Henry Paulson on Tuesday to discuss market turmoil.
But nothing was heard from Bernanke himself and Richmond Federal Reserve Bank President Jeffrey Lacker dampened hopes for an imminent rate cut.
Financial market volatility, in and of itself, does not require a change in the target federal funds rate, in my view, he said.
U.S. stock investors appeared to be discounting a Fed cut -- the Dow Jones Industrial Average was up 105.60 points, or 0.81 percent, at 13,196.46, shortly after the open.
The Wall Street Journal reported on Wednesday that Fed officials were cautiously optimistic the steps they have taken to relieve a squeeze in credit markets were working and may wait until their next policy meeting before considering a rate cut.
Market speculation has been feverish that the U.S. central bank could cut its fed funds rate before its regular meeting.
We think the Fed is further away from an emergency cut than perhaps the market does at the moment, said Jim Reid, a credit strategist at Deutsche Bank. The Fed will want to see how their action regarding cutting the discount rate will impact the market before engaging in more serious measures.
Japanese Finance Minister Koji Omi, on a visit to South Korea, said the global economy was solid but financial markets needed to be watched closely, even though liquidity problems had been addressed by a massive injection of central bank funds.
The world's economic fundamentals remain sound, he said.
But IMF First Deputy Managing Director John Lipsky told the Financial Times global growth would certainly take a hit.
This undoubtedly will dampen economic growth, he said. It will ... take some time for markets to restore a normal amount of volatility.
Germany's DIHK industry group said the European Central Bank should not tighten borrowing costs at its meeting next month as there were signs the credit crisis would curb growth.
French Economy Minister Christine Lagarde went further, suggesting a rate cut. It would certainly help enterprises. It would also help the market at the moment, she told BBC Radio.
Interest rate expectations have lurched dramatically since problems in the U.S. home loan market threatened a wider liquidity crisis and sent markets into a tailspin.
Analysts expect the Bank of Japan to sit tight at a two-day meeting starting Wednesday. It had previously been expected to raise to 0.75 percent from 0.5.
MORE CORPORATE TROUBLE
Investors remain braced for further corporate crises to emerge from the U.S. subprime mortgage market.
First Magnus Financial Corp, one of the largest independent U.S. mortgage lenders, filed for Chapter 11 bankruptcy protection on Tuesday, the latest home loan provider to collapse as the housing market slumps and the credit crisis widens.
And San Diego-based Accredited Home Lenders Holding Co said it had stopped taking loan applications and would cut 1,600 jobs, citing subprime mortgage losses.
Investors are just waiting for some big, bad news to come out, said Leslie Khoo at Forecast PTE in Singapore.
But some saw grounds for optimism after BNP Paribas said it planned to re-open by the end of August three investment funds frozen earlier this month because their net asset values could not be calculated.
BNP's action on August 9 helped set off a flight to safe haven assets that sapped confidence and liquidity from money markets. The ECB stepped in later that day and pumped in a record 94.8 billion euros ($131 billion) to calm fears of a credit crunch.