European markets higher as Asia recovers

updated 10:43 a.m. ET Oct. 17, 2008

LONDON - European stock markets were higher Friday following the strong rebound on Wall Street the previous session and the Nikkei index’s recovery overnight in Japan, but worries about the state of the U.S. economy continue to weigh on investors.

The FTSE 100 index of leading British shares was 77.40 points, or 2.0 percent, higher at 3,938.79, while Germany’s DAX was up 101.03 points, or 2.2 percent, at 4,723.84. France’s CAC-40 was up 60.77 points, or 1.9 percent, at 3,241.77.

Even though stock markets were up Friday, traders remained nervous after an extremely volatile week when massive gains on Monday and Tuesday were mostly erased in the following two sessions. That volatility was evident Thursday on Wall Street where a late wave of buying lifted the Dow Jones index 4.7 percent to 8,979.26, a swing of more than 800 points over the day. The Dow remains up 528 points, or 6.3 percent, for the week.

The long-term key to the health of financial markets is whether the flurry of activity by governments over the last week or so can actually break the logjam in credit markets.

There are growing signs that the coordinated interest rate reductions announced last week, and massive liquidity boosts by central banks, are beginning to reduce lending rates between banks.

The interbank lending rate for three-month dollar loans fell for the fifth day running, the first weekly decline in three months. It dropped 0.08 percent to 4.42 percent, while the three-month Euro Interbank Offered Rate, or Euribor, fell almost 0.045 percentage points to 5.045 percent.

Though the rates are falling, the differential between the rate at which banks lend to each other and official central bank lending rates remain high, signaling a strong degree of mistrust still exists. In the U.S. the base central bank rate is 1.5 percent, while in the euro area it stands at 3.75 percent.

“It seems that plans to inject public capital into the banking system are working to stabilize that part of the financial scene,” said Stephen Lewis, chief economist at Monument Securities.

However, he noted that threats exist elsewhere, from credit default swaps — which insure against defaults on securities — from the insurance sector and from emerging markets.

“Governments have much to do still if they are to revive mechanisms that allocate capital on a rational basis,” said Lewis.

Though the rescue packages have helped alleviate the pressures on the banking system, it is feared they will do little to stop a serious economic slowdown.

Concerns about the global economic outlook have taken their toll on oil prices, which remains near 14-month lows of $69.96 despite growing talk that oil cartel Organization of Petroleum Exporting Countries will cut production in an attempt to boost prices.

The fall in the price of oil has weighed on markets in Russia, where indexes continued their losing streak on Friday, with the MICEX dropping 5.2 percent and the RTS down 5.6 percent.

Earlier, Tokyo’s Nikkei 225 stock average advanced 235.27 points, or 2.78 percent, at 8,693.82. The index was still far from recouping Thursday’s 11.4 percent loss — its biggest one-day percentage drop since the stock market crash of October 1987. For the week, the Nikkei gained 5 percent, much better than the 24 percent it lost last week.

Compared to the gyrations earlier this week, Asian markets were moderately more stable.

Shanghai’s index rose for the first time in a week. But Hong Kong’s Hang Seng index dropped over 4 percent to 14,554.21, its lowest level in almost three years as selling accelerated late in the day after banks said they would help investors in Lehman Brothers-backed bonds recouped some of their money. Australia, Singapore and South Korea also closed lower.

Governments across Asia remained focused on the financial crisis. Late Thursday, Malaysia said it would guarantee all bank deposits for the next two years, following similar moves by Hong Kong and Singapore amid fears about the health of banks.

In Australia, Prime Minister Kevin Rudd gave a reassurances that the country would pull through the crisis “in good shape. He said he would soon present a proposal in response to the crisis that would include a review of executive pay at financial institutions.

With crisis and recession talk still weighing heavily, Japan investors bought targeted sectors such as utilities and telecommunications, whose earnings are considered somewhat insulated from global downturns. Nippon Telegraph and Telephone Corp. soared 9.82 percent and Tokyo Gas Co. jumped 5.85 percent.

In currencies, the dollar declined to 100.91 yen from 101.30 yen late Thursday. The euro was down at $1.3416 from $1.3492.

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