US rate cut tonic for London

THE tenth interest rate cut by America's Federal Reserve on Tuesday night looked set to help take London's leading shares to their highest levels in more than two months today.

With the US central bank cutting its benchmark Fed funds rate to 2%, its lowest level since 1961, traders in London were expecting the Bank of England's monetary policy committee to follow suit tomorrow by cutting rates here from their current 4.5%. The committee starts its two-day meeting today.

City bookmakers were calling the market sharply higher at the open on the back of the US rate reduction. Financial Spreads was predicting that the FTSE 100 would be up 65 points at 5279. The index closed up five points at 5214.1 on Tuesday night, its fifth straight gain.

'All indices made new 20-day highs and trend followers love that signal. It is therefore expected that a lot of momentum players will jump on board and buy stocks. We are calling all European indices higher and we expect a solid morning with very healthy gain,' the company said. 'It does say a lot about the uncertainty of the second-quarter recovery story that the Fed cut by 50 basis points again. Nothing is certain yet, but players in the market were happy that they got what they wanted.'

Rival Cantor Index was forecasting the Footsie would rise 41 points at the open but, with interest-rate sensitive stocks set to be the largest gainers, was calling the techMARK 100 down 12 points.

But there are concerns the easing world interest rates will take longer than expected to lift the US. Some investment banks forecast the American economy, already in reverse, will decline as much as 2.5% in the fourth quarter. That leaves the market expecting a further quarterpoint cut in US interest rates on 11 December.

'The deteriorating economy may mean that even though households can afford to service their debt, they may be reluctant to take on any more. On the corporate side, the low rates of capacity utilisation and high debt levels may also mean that firms are reluctant to borrow more for investment, no matter how low the cost of capital gets,' said ABN Amro.

Oil prices continued their slide in overnight trading, falling 19 cents to $19.73 a barrel on the Nymex December contract. The London crude price, which fell below $19 for the first time in more than two years on Tuesday, was expected to remain under pressure.