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NEW YORK: World stock markets saw heavy turbulence for a second straight day on Tuesday, with investors rattled by fears of a widening financial crisis, but Wall Street rallied in a volatile session.
Markets had been under pressure amid fears of a collapse of American International Group, a global insurance giant with US$1 trillion in assets, whose failure could lead to a financial calamity, according to analysts.
But traders in New York turned positive on reports of a possible rescue of AIG and appeared encouraged by a Federal Reserve decision to hold interest rates steady despite the recent market turmoil - a move seen as a sign of confidence in the economy.
The Dow Jones Industrial Average shook off early losses and rallied 1.30 per cent to 11,059.02. The tech-heavy Nasdaq composite rose 1.28 per cent to 2,207.90 and the broad Standard & Poor's 500 index vaulted 1.75 per cent to 1,213.60.
The wild action came as the market followed the fate of AIG, feared to be the next domino to fall in the financial crisis after Lehman Brothers.
"The market couldn't decide whether to buy low or keep panicking," said Elizabeth Harrow at Schaeffer's Investment Research.
AIG shares plunged more than 70 per cent at the open, and then climbed back to show small gains, before slipping at the end of the day. The shares lost 21 per cent after a 60 per cent plunge Monday.
The market action came after heavy losses in Asia that spread to European exchanges a day after US investment giant Lehman Brothers stunned the market with a bankruptcy filing.
In London, the FTSE 100 index closed down 3.43 per cent to 5,025.6, having been down more than four per cent at one stage to breach support at 5,000 points for the first time since 2005.
In Paris, the CAC 40 shed 1.96 per cent to 4,087.40 and in Frankfurt, the DAX was off 1.63 per cent at 5,965.17, with both markets down more than three per cent earlier in the day.
Elsewhere in Europe, losses were widespread, with some of the smaller markets among the worst hit.
In Russia, the main RTS stock market suspended trading after falling by more than 11.47 per cent, a spokeswoman said, following a move by the number two Micex bourse to do the same.
With nerves jangling, the US Federal Reserve, European Central Bank, Bank of England and Bank of Japan together injected US$210 billion into the money markets on Tuesday to boost liquidity.
The Fed appeared to disappoint the market by holds its base lending rate at 2.0 per cent, defying widespread market expectations for a quarter-point cut to help get credit flowing. US stocks slumped initially before rallying.
"Did the Fed do the right thing? We will know the answer to that only in time, but it was a reasonable decision," said Joel Naroff at Naroff Economic Advisors.
"As I have noted on a number of occasions, the problem is not the level of rates but liquidity and the willingness to lend."
Some were befuddled by the Fed announcement.
"To read their statement, you would never know the sky has fallen in on Wall Street," said Ian Shepherdson, chief US economist at High Frequency Economics.
"In our view this statement is either very brave or very reckless."
John Ryding at RDQ Economics said the rally was inspired not by the Fed decision on rates but by reports that the central bank was working to stave off a potentially catastrophic collapse at AIG.
He said the rally came "because of a perception that the Fed has some other card up their sleeve on AIG."
Some reports said a crisis meeting at the New York Fed was working on a plan to provide the troubled insurance giant with a short-term loan of US$75 billion to stave off bankruptcy.
David Kotok, chief investment officer at Cumberland Advisors, said the Fed is compelled to act to avert a calamity.
"This has the appearance of a cascade or a contagion," he said. "Failure of Lehman has created contagion because of counter-party risk that was not contained by the Fed. Failure of AIG will make this much worse."
He added that "stemming a contagion is the job of the central bank. And it must apply its lender of last resort function."
In other global markets, Brazil's Bovespa index rebounded with a 1.68 per cent gain while Canada's S&P/TSX index fell 0.22 per cent.
Across Asia on Tuesday, officials called emergency meetings as trading screens went red on the heels of the biggest one-day point loss for Wall Street's Dow Jones index since the September 11 attacks.
Japanese shares dropped almost five per cent and Hong Kong shed 5.4 per cent.
Seoul shares closed 6.1 per cent lower while the South Korean currency, the won, fell 4.3 per cent against the dollar, its biggest daily drop in a decade.
- AFP/yb
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