ECONOMY-CREDIT
AUGUST 23 2007 09:13h
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Uncertainty in global markets prompted the Bank of Japan to skip a rate rise on Thursday.
The mood in the region's markets mirrored a relative calm in global money markets on Wednesday, when investors ditched some safe-haven positions and the four largest U.S. banks made a show of support for the Federal Reserve.
"I think calm has returned and we should probably see stabilising markets from now on. From a fundamental point of view Asia is very strong.
"The volatility that we saw in the last couple of weeks should be a thing of the past as long as we don't see any more bad news out of the United States," said Prakash Sakpal, an economist at ING Financial Markets.
Asian stocks jumped on Thursday with markets from Seoul to Sydney posting gains of more than 2 percent after signs that U.S. takeover activity could soon recover boosted Wall Street on Wednesday.
China's main stock index, which has already more than quadrupled since the start of last year, topped 5,000 points for the first time.
"We saw two straight gains of stock market gains in Asia and the U.S. markets consolidated over night. That instilled some confidence," Sakpal said.
But some market participants remained cautious saying short-term shocks were to be expected.
"I think there are still a lot of skeletons in the cupboard. Markets have really bounced, which I think is pretty scary given last week's panic. Chinese shares are at a record and the rest of Asia is riding on the coat tail -- it doesn't feel right," the markets head of a big European bank in Singapore said.
The Bank of Japan left its key policy rate unchanged for the sixth month running in the wake of a global markets shake-out stemming from subprime mortgage problems in the United States.
That has raised concerns that a U.S. downturn would reduce demand for Japanese goods.
The central bank kept to its view that the world's second-biggest economy was expanding moderately, although it noted long-term interest rates and stocks have fallen on increased global uncertainties.
Just a month ago, investors had widely expected the Bank of Japan to raise interest rates in August to 0.75 percent from 0.5 percent.
In a further sign that pressure on money markets is easing, Australia's central bank on Thursday injected less cash into the banking system than in previous days.
The Reserve Bank of Australia added A$1.875 billion ($1.5 billion) in cash in its regular daily money market operation, slightly higher than an estimated deficit of A$1.840 billion.
The injection compared with A$4.678 billion on Wednesday and A$3.45 billion on Tuesday and a daily average of about A$2.55 billion last week.
New Zealand's central bank said it could accept bank bills as collateral, in addition to government bonds and bills, in its overnight reserve repurchase facility to help market liquidity.
In the United States, rumours swirled that the Federal Reserve will take additional steps in coming days, including a cut to the fed funds target rate for overnight interbank lending, its key monetary policy tool, after slashing its discount rate for direct lending to banks last Friday.
But for now efforts by the Fed and European Central Bank in particular to deal with the worst liquidity and credit squeeze in a decade have helped stabilise financial markets, and perhaps given the U.S. central bank time to wait for fresh data to test its view that the economy is still sound.
Investors even returned to believing a European Central Bank rate rise in September would go ahead as expected, another sign that "business as usual" is overtaking "panic stations."
The four largest U.S. banks bellied up to the Fed discount window on Wednesday. Borrowing money directly from the Fed is often seen as a sign of weakness.
But JPMorgan Chase & Co., Bank of America, Citigroup and Wachovia Corp. took $500 million each, saying they had made the move for the sake of the financial system even though they have ample access to funds elsewhere. ($1=1.243 Australian Dollar)
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