Global Financial Markets Respond

After two days of market turmoil in Europe and Asia, the Fed’s emergency cut of 3.5% just one hour before the stock exchange opened in New York, failed to entirely calm the U.S. market.

The biggest rate cut in nearly 20 years didn’t calm jittery investors either. If anything it just confirmed their impression that the US economy and the rest of the world’s markets were in a whole lot of trouble.

It was not all doom and gloom however. Although in the US, the Dow Jones and S&P 500 indexes were still down when markets closed, the UK’s FTSE 100 index closed 2.9% higher after falling more than 3% earlier and France’s Cac also bounced back.

Meanwhile Asian stocks began global trading sharply lower on fears of a recession in the U.S., with Japan’s Nikkei 225 index off 5.7 percent – its biggest percentage drop in nearly 10 years – and Hong Kong’s Hang Seng index down 8.7 percent.

The Fed’s surprise rate cut was aimed at calming fears that trouble in financial markets from the U.S. subprime crisis was spreading to the broader economy.

European monetary policy makers seemed in no hurry to follow their U.S. counterparts however.

According to Germany’s Chancellor Angela Merkel, Europe’s economy was an “anchor of stability in the world” and added in an interview on German TV: “There are no signs of a recession in Germany, and that’s also the case for Europe.”

Meanwhile Jean-Claude Juncker, the senior finance minister for the euro zone economies, said he was keeping a close eye on developments but right now saw no danger of U.S.-driven turmoil spilling over to global recession.

The Federal Reserve’s rate cut appeared to have prevented a sudden bout of panic selling and helped stabilise the U.S. market to some extent.

At its deepest point Tuesday’s losses represented a fall of 3.7 per cent but at the close of the morning session the Dow industrial average losses had been contained to less than one per cent.

Nonetheless, U.S. financial markets are not out out of the woods yet and the coming days could hold more nasty surprises.