World Stock Markets Assess U.S. Rate Cut

Jan 22, 2008— -- Seoul, South Korea

Korean stocks suffered a major blow, ending down 4.4 percent Tuesday, following a 3.3 percent fall the previous day. It was the biggest percentage loss in five months. Trading started with a panic sell-off in reaction to the global equities turbulence and was later suspended for five minutes as the benchmark KOSPI index plunged more than 6 percent. But the market picked up by the close, which analysts said was due to solid economic fundamentals.

"There's huge psychological affliction here. The Korean stock market can sometimes be irrational, like a lemming effect. The KOSPI tends to mirror the Dow for no reasonable reason," said Thomas Shin, Head of Bain & Co. in Seoul.

Senior financial officials will hold an emergency meeting Wednesday to decide whether measures are needed. The U.S. Federal Reserve's wider-than-expected rate cut is expected to have a positive impact in calming the panic in Seoul. Analysts said as long as the New York Stock Exchange reacts to the rate cut, the KOSPI will see a technical rebound, especially due to strong exports and a strengthened Korean win against the U.S. dollar.

Mumbai, India

After crashing to a record low Monday, India's Sensex market opened Tuesday only to plunge again within minutes, this time dropping 11 percent before triggering an automatic halt for one hour.

The market did recover later in the afternoon to close down about 5 percent. At one point during the day, 1,190 of the index's 1,198 stocks were down.

It is clear that India, despite being one of the fastest-growing economies in the world, is not immune to the global economic woes.

Indian Finance Minister Palaniappan Chidambaram continued to urge investors to "remain calm" and ignore the turmoil in Western markets. He said the Indian economy was expected to grow at 9 percent this year and 8.5 percent next year.

The financial crisis in the United States has spread global fears, including in India, which relies on the United States for exports and outsourcing contracts.

"The rate cuts will soothe a little bit of jangled nerves at this time. I think it will have a definite positive impact on the market and also the Asian markets, because there's been a very sharp 30 percent drop across Asia," said Ketan Gandhi, 43, director of financial services for Pioneer Invest Corp., a financial services and brokerage house based in Mumbai. "So it will kind of sentimentally help improve things."

While Gandhi said there could be a knee-jerk instantaneous improvement tomorrow, he believes the market will even itself out over the next week to 10 days.

Dubai, UAE

The global money crunch has even taken a bite out of the oil-rich countries of the Arabian Gulf. Saudi Arabia's stock market, the largest index in the Arab world, fell a record of nearly 10% in Tuesday's trading. In Dubai the .DFMGI benchmark ended down 6.21%, while neighbor Abu Dhabi's index fell 6.83% -- its largest one-day drop in history. Elsewhere in the Gulf Qatar fell 7.76% while Oman dropped 8.33%.

"This is almost mayhem," Shakeel Sarwar of Bahrain's SICO investment bank told Al Arabiya news channel. "We didn't even see this in the crash of 2006."

Analysts blame the drops on fears of an economic downturn in the United States, a key ally and trade partner with Gulf Arab countries. It's the first financial pinch this region has felt for some time. With rapid growth fueled by billions of incoming dollars from record oil prices, regional economies were riding high until this week.

The interest rate cut by the US Federal Reserve creates immediate pressure on Gulf economies to mirror the move. Almost all Gulf currencies -- including heavy oil producers Saudi Arabia, Oman, Qatar, and the United Arab Emirates -- have pegged their currencies to the US dollar. That means following the Fed, despite the fact the opposite move, namely, raising interest rates, is what's needed to cool the inflation risks of their white-hot economies. Inflation is well over 10% in some Gulf Arab countries.

Nairobi, Kenya

Just a month ago, a federal interest rate cut in the United States might have been considered good news for Kenya, a country that enjoyed a favorable credit rating, or bad news, because signs of a U.S. recession would mean less tourism and fewer trade dollars coming into the country. Now, according to Kenyan economists, Tuesday's news will mean little to nothing for the country's economy.

The violence and unrest that has followed Kenya's presidential election last month has left one of the most stable economies in Africa on the border of ruins, says economist Robert Shaw.

Shaw says a rate cut in the United States isn't going to make much of a difference.

"It's not very relevant, because what's going on here at the moment is largely domestic. Outside people are … demanding higher premiums, regardless of what's happening in the U.S.," he said.

"There will be some African countries that will benefit, but the risk factor for Kenya is going up, not down. It's irrelevant to Kenya how much the U.S. reduces the benchmark."

Rio de Janeiro, Brazil

The U.S. rate cuts may have only given a brief boost to stocks, but in Brazil, the discovery of a huge gas field has given an extra lift to the energies market. Buoyed by the announcement, shares of the Brazilian state-run energy giant, Petrobras, were given a lift, provoked by the potential of the gas field, which is said to be "huge."

Brazil currently relies on getting most of its natural gas from Bolivia. Analysts, however, were quick to point out that the exact dimensions of the discovery were as yet unknown, but this announcement has gone some way to allay any fears of a possible energy crisis in Brazil, which has been the source of much contention for the Brazilian government. In recent days, the government was forced to make a statement denying the possibility of energy shortages caused by droughts and affecting the country's hydroelectric power stations.

While this discovery has had a positive impact on the Bovespa, the Sao Paulo stock exchange, there are still other sources of concern. Brazil is a major exporter of goods to the United States. Although in recent years there has been a slight reduction in exports to the United States, it is still a major supplier of car parts to its northern trade partner. If a recession were to hit the United States, then the industries involved in manufacturing these car parts would be affected, as would, in turn, the country's steel industry.

Brazil has seen a strong surge in its economy in the past two years. Trade relations with China, a significant importer of Brazilian goods, especially soybeans, have bolstered its financial strength in Latin America, and there is strong evidence of its economic boom from 2007. Last year, around 60,000 Brazilians became millionaires for the first time.

Economist Adhemar Mineiro puts it down to the Brazilian economy's strength being linked to domestic growth but said there is still a dependence on international credit programs, which could threaten the continuation of such growth.

"A U.S. recession could affect the Brazilian economy," Mineiro told ABC News. "That dynamism that was seen last year will continue to be visible in the markets here during the first trimester, but there is uncertainty if it will be seen in the second trimester."

Brazilian President Luiz Inacio Lula da Silva said Tuesday that while he was not yet troubled by the U.S. developments he would step in if the situation deteriorated. In the meantime, people here are looking north to gauge what Brazil's next financial move may be.

European Markets

It was an up and down and up again day on the European markets, with all eyes looking toward Wall Street.

While some experts called it a roller coaster kind of day, others were quick to put a calming tone to it.

"We saw kind of a stabilization today," Joerg Kremer, chief economist at Commerzbank Headquarters in Frankfurt, told ABCNews.com. "The U.S. interest rate cut had a short-term effect; it sure has prevented another sharp fall. Whether this is going to have a long-term effect remains to be seen."

Though they started the day mostly down, news of the U.S. rate cut sparked immediate excitement on trading floors.

London's FTSE index shot up 2 percent in a matter of minutes. But that euphoria was short-lived.

Speaking to traders here in the middle of the mayhem, many said the interest rate cut actually worried them.

"If the cut is so big, the Fed must really believe things are bad," one U.K. trader said when interviewed by ABCNEWS.com.

Still, by the end of the day, lower U.S. interest rates were beginning to do their work, helping to bring up two of the major indexes.

London's FTSE finished up 2.9 percent and France's CAC 40 up 2.07 percent.

However, Germany's Dax, one of the hardest hit in recent days, added to its losses, closing down 0.31 percent.

"It was a bit like a yo-yo day," Joachim Llambi of Concord Investment Bank in Frankfurt told ABC News. "I think we're not over the hill yet, but at least we did not suffer the kind of losses that the Asian markets had. We're still watching developments amid concern that the U.S. is heading into recession, and things remain very exciting, because whenever the U.S. has a cough, Europe comes down with the flu."

Some newspapers in Germany dubbed it Black Monday, pointing to the market's worst one-day percentage fall since the 9/11 terror attacks.

Germany's best-selling tabloid Bild Zeitung prominently displayed the dreaded C-word (as in Crash) on its front page in big headlines: "Börsen Crash -- What does that mean to your money?" reflecting what many people here ask.

Experts, however, urged investors to stay calm, and some actually suggested that private investors should take advantage and buy some cheap stock.

"We're still going to be in some troubled waters, but I would advise people to remain calm and not to push the panic bottom," Frankfurt trader Joachim Llambi said.

And in Brussels, where European finance ministers were meeting today, Joaquin Almunia, member of the European Commission in charge of economic and monetary affairs, was confident that Europe could master the situation.

"We have sound fiscal positions. We are well prepared to weather this situation, even if we cannot ignore the risk of our growth rates being affected by this turmoil," he told journalists at a press conference.

Reporting by ABC News' digital reporters Joohee Cho, Karen Russo, Dana Hughes, Sonia Gallego. Christel Kucharz and Jim Sciutto reported from Europe.