European share prices have recovered strongly on hopes of further cuts in interest rates in a number of EU states in the run up to monetary union.
An aggressive half a percentage point cut in Spanish interest rates gave an early boost to beleaguered European markets, as analysts forecast further cuts in Italy and Portugal. The Central Bank of Ireland is also expected to shortly commence moving rates down towards German levels. Many in the Dublin markets believe that the Central Bank will begin the programme of interest rate convergence with an interest rate cut shortly, possibly after the release of the September inflation figures tomorrow, or when they announce the weekly rate at which funds are supplied to the wholesale money market next Monday. A sharp early rebound on Wall Street, which rose by almost 150 points during European trading hours gave the markets another boost, but the New York market had lost most of those gains by the time European markets closed. At the close last night the Dow Jones was up 16.74 at 7742.98.
A European equities strategist at Merrill Lynch investment bank, Mr David Bowers, said: "People have been depressed for 10 weeks now ... people now realise that an economic area about 80 per cent the size of Germany is now going to have to cut its interest rates, whether it likes it or not, before the year is out."
While peripheral EMU countries were thought most likely to cut rates soon, French Prime Minister Mr Lionel Jospin tossed fuel on the flames when he told the National Assembly that he favoured "a policy looking to lower interest rates" in Europe, indicating that he believed that base euro interest rate levels - the rates now prevailing in Germany and France - may also have to fall. Europe should target "a concerted policy aiming at stronger economic growth," Mr Jospin said. Expectations that the Bank of England will cut base rate after its two-day monetary policy meeting this week gathered force after official figures showed that factory output slumped by 0.5 per cent in August.
In London, the FTSE-100 index surged 4.4 per cent (or 205.3 points) to close at 4,854 points, the biggest one-day gain for 6 1/2 years. The Dublin market failed to match the gains in London, but share prices still rose by over two per cent with financial shares, including market debutant First Active, recording the best gains.
The Frankfurt market jumped by 5.4 per cent, taking the DAX30 index to 4,185.39 points at the close of electronic Xetra trade. In Paris, the CAC-40 index closed 5.24 percent higher at 3,136.03 points. The French market had fallen to lows not seen since December 1997 on Monday.
In Madrid, the Ibex-35 index closed almost six per cent up on the day after the Spanish central bank reduced its key lending rate by 0.50 percentage points. The Amsterdam market rose by 5.9 percent and in Milan, the Mib 30 index closed 5.47 percent higher.
Despite the sharp rally, some analysts believe that the European markets would be subjected to more volatility in the coming sessions. "It's a roller-coaster game ... I don't think we are out of the woods yet until we see the dollar back on an upward trend and until we see clear signs that Latin America's problems have been headed off," one said.
