Markets gain ground ahead of expected US rate cut

The recovery on the world's stock markets continued unabated yesterday as traders savoured the prospect of a cut in US interest rates tomorrow.

A 3 per cent spike in Hong Kong, the first major bourse to start the week's trading, triggered copycat buying sprees around the world.

The positive sentiment spilled over in Europe where London had one of the largest gains. The FTSE 100 closed up 3.6 per cent, at 4,141.5, while the markets in France, Germany, Italy and Spain all rose between 3 and 5 per cent.

On Wall Street the hi-tech dominated Nasdaq index closed up 2.6 per cent as investors also applauded the settlement of the anti-trust case against Microsoft late on Friday. The Dow Jones ended up 54 at 8,571.6, having earlier climbed 213 points.

Hopes that the Federal Reserve Board will cut rates this week have risen sharply over recent days in the light of a string of poor economic news.

Consumer confidence has plunged, manufacturing is on the brink of recession and durable orders have tumbled, while the latest GDP figures show the economy is growing more slowly than hoped for.

Twenty-one of the 22 Wall Street economists polled by Reuters expect a rate cut, and most expect it to be a modest quarter-point to 1.50 per cent. The money markets are pricing in a 95 per cent chance of a cut.

Bruce Kasman, the US economist at JP Morgan, said: "The risk that recent weakness feeds on itself has risen as the slowdown combines with a slide in business and consumer confidence."

Analysts said hopes of a half-point cut were adding to speculative buying among investors waiting for an opportunity to buy. "For equity investors, at the very least this will serve as a reminder of just how far the returns on cash have fallen, and we continue to believe the market can run further, bear market rally or not," CSFB said.

European markets are also likely to share in a post-rate cut euphoria although experts are divided over whether the Bank of England and the European Central Bank will follow suit on Thursday.

Philip Shaw, the chief economist at Investec, said he expected the Bank to order a cut. "Manufacturing is weak, consumer spending growth is weakening and there are considerable downside risks to the global economy," he said.

But others believe that with the FTSE 100 up 12 per cent since its recent trough and the housing market still booming, there is little justification for a cut. There was fresh evidence of a property boom from a construction industry survey that showed October was the best month for housebuilders since June last year.