Markets rebound on US bailout plan hopes

STOCK MARKETS rebounded yesterday on hopes that the US will be able to push through its $700 billion bank bailout plan this week.

On Wall Street, markets recovered from their worst session in 20 years and the dollar gained significant ground against the euro and other currencies.

In Dublin, government intervention to guarantee deposits and borrowings of the six major Irish-owned financial institutions saw the market surge ahead for the opening.

Business was concentrated in banking stocks. By the end of the day, they had climbed over 27 per cent, recovering much of the ground lost in Monday's slide and making the Irish Stock Exchange one of the best performers worldwide yesterday.

Anglo Irish Bank led the charge, adding 67 per cent to its overnight value in heavy trade. Strong gains were also made by Irish Life Permanent, Bank of Ireland and AIB.

In London, the FTSE 100 jumped 1.74 per cent but the gains were not sufficient to prevent the blue-chip index from recording its worst monthly performance since the crash of October 1987.

The FTSE Eurofirst 300 rose 1.5 per cent. The main markets on continental Europe - in Germany, France, Italy and Spain - traded cautiously yesterday morning, losing further ground as they waited for a signal from Wall Street.

The upbeat opening in New York was enough to turn the trend on all but the Milan market.

In New York, the Dow, which suffered a record points slide on Monday, fell about 11 per cent over the month. It was up about 2.6 per cent by mid-session yesterday as optimism grew that US lawmakers would find a way to pass the bailout plan to restore the banking sector to health. The SP was up 3.3 per cent by mid-session.

The dollar jumped by 1.7 per cent against the euro - the biggest one-day move since the inception of the European currency - as hopes for the US plan revived and problems with the European banking sector mounted.

But strains in the money markets also intensified because it was the end of the quarter, traditionally a time of acute funding pressure, and fear continued to grip bank lending markets because of counterparty risk.

Overnight dollar London interbank offered rates (Libor) jumped 4.30 percentage points to 6.87 per cent - the highest level in seven years - while three-month money also rose.

The spread between three-month dollar Libor and expected average overnight rates - the key measure of credit risk - jumped to a new record high.

Corporate short-term borrowing rates rose the most in 13 years as yields on overnight US commercial paper jumped 1.71 percentage points to an eight-month high of 3.95 per cent.

Traders in Dublin said that, despite the sharp recovery yesterday, market fundamentals remained the same.

"This morning's trade reflected the exceptional circumstances of the government move which was very well received, but credit markets remain frozen and the economic outlook is not strong." - ( Additional reporting Financial Times service/Bloomberg)