Put January 22, 2008 in your history books as the day the US Federal Reserve came charging in on their gallant white steed to save the collapse of global financial markets.
With the New York Stock Exchange having had Monday off for the Public Holiday of another great American hero, Martin Luther King Jr, it was a timely and somewhat surprising intervention from a modern day white knight in the form of US Federal Reserve Chairman Ben Bernanke, that saved the day and perhaps signals the end to the recent run of share price crashes around the world.
The Federal Reserve dropped official interest rates 0.75% in the first unscheduled change since just after the 9/11 tragedy.
And it could not have been better timed, with the Dow Jones down over 400 points on opening, the largest in history. Once news of the cut filtered through markets rallied to close down only 128 points, a dramatic turnaround.
There is no doubt that had the rate reduction not occurred, then the market would have taken an enormous tumble, following the lead from Asian and European Markets that had fallen between 3% and 6% the day prior.
This could have been the final straw that had the potential to decimate markets and create a dangerous financial condition that would have been difficult to recover from.
This shot in the arm has had an immediate impact, pushing the ASX All Ordinaries up over 5% in early trading and will likely have a follow on effect when other Asian and European exchanges open later in the day.
The Australian markets had had a record 11 consecutive days of decline, so no doubt they will enjoy today and see it as a turning point.
The Australian dollar strengthen on the news as Australia’s interest rate now remains one of the highest in the western economies and pressure will mount on the Reserve Bank of Australia to follow suit with a reduction of some magnitude, albeit unlikely to be as great as that in the US.
The US Rate reduction is seen as the first phase of reigniting a sluggish US economy which is sending waves of fear through financial markets around the world.
President George Bush is also working on a stimulus package in unison with Congress, expected to be worth upwards of US$150 billion.
It is also widely expected that a further interest cut of 0.25% will be announced by the US Federal Reserve at its scheduled meeting next week.
Markets have taken great comfort in the fact that the problems are being acknowledged and acted upon, so we may see some nervousness continue, but overall stability should start to be restored.
Global share markets have fallen almost 30% in the past 5 months, so stability will be welcomed by many investors hoping to recover these losses on their portfolios.
The buy product of all of this will be a new found knowledge by investors to be careful about asset selection, and remember that stock markets can be volatile. For those that have not panicked and sold out things should normalize.
Property will once again begin to take centre stage as a more traditional safe haven, which could be the important spark needed to reignite the US Property market, and be a catalyst for other global property markets such as Australia, as investors look for a smoother les scary investment option than that of the recent roller coaster ride offered by the share markets.
