Bank rescues spread in Europe on Tuesday and some investors expressed faith that the US Congress would eventually pass a $700-billion bailout plan for the financial sector.
United States stock index futures rose 2,5%, suggesting stocks will open higher on Wall Street, after the US House of Representatives rejected the rescue plan and sent markets spinning on Monday.
”It’s certainly my working assumption that there is some sort of agreement reached in the US, and based on that I would expect the market to recover quite strongly from yesterday’s sell-off,” said Darren Winder, an equity strategist at Cazenove in London.
In Europe, Ireland unveiled a blanket guarantee for savings held by its banks, covering up to €400-billion ($575-billion) in liabilities, sending Irish bank stocks roaring up against a weaker sector trend.
Russia for the second time in a month briefly clamped its stock markets shut after just seconds of trading.
France joined Belgium and Luxembourg in a €6,4-billion lifeline for bank Dexia and said it would come to the aid of savers with new bank measures by the end of the week.
French President Nicolas Sarkozy began talks on the crisis with finance executives on Tuesday. He has said he will meet this week with officials from Europe’s G8 member states — Germany, France, Britain and Italy.
Leaders are trying to reassure global markets as financial shares reel, threatening the existence of major banks, which have stopped lending to one another despite enormous injections of funds by central banks.
”Market meltdown is likely to continue unless an alternative [US] plan is passed, which may or may not happen this week,” Dariusz Kowalczyk, chief strategist at CFC Seymour in Hong Kong, said in a note.
Facing the worst financial crisis since the Great Depression, global central banks scrambled again to try to relieve a severe squeeze in money markets by more than doubling the amount of dollar funding to $620-billion.
Bans on short-selling stocks spread to Russia, South Korea and Taiwan. Nervous investors piled into gold and US Treasuries. Oil fell on fears of further economic slowdown, and the Japanese yen hit a four-month high.
With Tuesday’s end of the financial quarter, Christian Noyer, a European Central Bank governing council member, sought to reassure investors.
”There is no reason to be frightened and to give in to panic,” he said on France’s RTL radio. ”I don’t say there won’t be things that will appear in the accounts that are published in the next weeks or months, but there is no drama in front of us.”
A week that started badly with the rescue of three banks in Europe and the distressed sale of big US lender Wachovia to Citigroup grew worse after the US Congress was unable to agree on a rescue package.
The Dow Jones industrial average posted its largest point decline ever on Monday, while the benchmark S&P 500 had its worst day since the 1987 crisis with an 8,8% drop. Latin American stocks tumbled 13%, their biggest decline in more than a decade.
US Treasury Secretary Henry Paulson said he would continue to work with Congress to formulate a bill that could pass. The Bill rejected on Monday was crafted by Paulson and Federal Reserve chairperson Ben Bernanke in negotiations with congressional leaders.
The Senate returns on Wednesday and the House on Thursday after a break for the Jewish New Year holiday of Rosh Hashanah.
US presidential candidates Barack Obama and John McCain both said Congress must pass the bailout plan, which now dominates the run-up to the November 4 election.
Republican House members voted against the rescue package by a more than two-to-one margin. A majority of Democrats voted in favour.
Failure to pass it after more than a week of high-pressure talks has triggered concerns that the US economy risks falling into a painful recession and dragging the rest of the world down with it.
US President George Bush was scheduled to make a statement on the bailout at 12.45pm GMT on Tuesday.
”Our strategy is to continue to address this economic situation head-on, and we’ll be working to develop a strategy that will enable us to continue to move forward,” he told reporters in Washington.
Lawmakers accused the administration of presenting the bailout proposal as an urgent demand, accompanied by warnings of potential economic collapse, after years of sky-rocketing Wall Street bonuses, abusive mortgage lending, and regulatory neglect. – Reuters