After an epic five-day swoon, Asian stock markets stabilized Thursday as investors took heart from a string of worldwide interest-rate cuts aimed at lessening the risk of a global recession.
The MSCI Asia Pacific Index finished the day up 1.2% after plummeting 16% during the previous week the worst stock market rout suffered by the region since 1987. Hong Kong's benchmark Hang Seng index gained 3.3% after an 8.2% drop yesterday, while Korea's Kospi index rose .6%. Japan's Nikkei index fell .5% after rising in morning trading hardly a robust recovery, but the panic selling that marked Wednesday's 9.4% free-fall dissipated, at least temporarily.
Market-watchers credited the relative market calm to Wednesday's coordinated rate cuts by the U.S. Federal Reserve and five European central banks. China, South Korea, Hong Kong and Taiwan also reduced benchmark lending rates. Ting Lu, an economist with Merrill Lynch in Hong Kong, called local market reaction to the cuts "generally positive, but cautious."
According to Lu, China's .27 basis-point cut signals that the country is now less concerned with fighting domestic inflation than in joining the rest of the world in battling a global slowdown. In a report released today, the International Monetary Fund warned that the world economy has entered a "major downturn" that would likely get worse before it gets better. It said central bankers trying to get a handle on the situation were "between a rock and a hard place."
China may cut rates two or three more times this year, Lu predicts, following a pattern established during the 1997 Asian financial crisis when the country used aggressive monetary policy to maintain economic growth. On Thursday Hong Kong, a Chinese territory, reduced its lending rate for the second time in two days, dropping it by 50 basis points to 2% amid what Monetary Authority chief Joseph Yam called "the financial crisis of this century."
Japan, which is believed to already be in a recession, did not reduce its benchmark rate because it already stands at just .5%. But the Japanese government announced that $20 billion would be injected into the country's financial system to help free up frozen credit markets.
The rate cuts' effect on Asian stock markets may not last as policymakers continue their search for a solution to the global financial crisis. According to a report in the New York Times, the U.S. Treasury Department is considering taking part ownership of U.S. banks, effectively guaranteeing the solvency of the country's financial system. Britain announced a similar plan to shore up shaky banks by helping them refinance debt in exchange for ownership stakes. That move toward partial nationalization of the banking system underscores just how deep and how apparently uncontrollable the financial panic has become. With few tools left to central bankers seeking to calm markets, investors are likely in for more anxiety.