Stock and money markets across the globe soared on Friday after the US government followed up Thursday?s $247 billion coordinated intervention by central banks worldwide with the biggest expansion of supervisory powers over the financial markets since the Great Depression of 1929.
US treasury secretary Henry Paulson and Federal Reserve chairman Ben Bernanke announced a raft of measures to help banks shed mortgage-related assets. ?We?re coming together to work for an expeditious solution aimed right at the heart of this problem, which is illiquid assets on financial institutions? balance sheets,? Paulson told a press briefing in New York.
Aimed at staunching the red ink splattered across credit markets as investors withdrew a record $89.2 billion from money-market funds since Wednesday, The US treasury used up its entire $50 billion reserves kept in the exchange stabilisation fund to ensure all demands for redemptions from money-market mutual funds were met. It also plans to buy all failed debt like those that drove Lehman Brothers into bankruptcy and sequester them into a fund.
The markets were also helped by a temporary ban imposed by market regulators in the UK and the US on short selling of stocks. This means no investor can bid against the chances of a bank or financial entity recovering its losses. The ban will run until October 2. Shares of companies like Morgan Stanley rose as a result.
The slew of decisions led many hedge funds to unwind their positions, helping markets to recoup some of their losses, estimated at $1.9 trillion in three days this week. The dollar strengthened, while two-year Treasury notes fell the most in 23 years, sending the yield up from the lowest level since mid-March. The steps follow an announcement made by US President George W Bush that his administration is working on plans to calm the tumult in financial markets.
Key Indian equity indices posted their best gains in the last two months. There was short-covering and value-buying at lower levels, with the BSE Sensex posting a gain of 726.72 points, or 5.46%, before closing above the crucial 14k level at 14,042.32 points. The wider S&P CNX Nifty of the NSE closed at 4,245 points, up 207.10 points, or 5.13%.
Tracking overnight gains in US markets, key Asian markets surged in a range of 3% to 9%. The Dow Jones Industrial Average rose 410.03 points to close at 11,019.69 on Thursday, followed by the Nasdaq index, which climbed 100.25 points at 2,199.10 and the S&P 500, which gained 50.12 points to close at 1,206.51.
At the time of going to press, the Dow was up almost 350 points.
Talking about the Indian markets, Manish Sonthalia of Motilal Oswal Securities said, ?In the short term we would still see some short-covering as the expiry of derivatives contracts is next week. The outcome of the Indo-US nuclear deal will also be tracked by the market.?
On Friday, according to provisional figures from the stock exchanges, amid huge gross values, foreign institutional investors were net buyers of equities worth Rs 1,016 crore, while domestic institutions were net buyers of Rs 43 crore. All sectoral indices ended in positive terrain. Realty, IT and financial stocks led the pack, dealers said. Other sectoral indices moved in a range of 2-7%.
Meanwhile, government data on advance tax paid by corporates confirmed the slowdown in the economy. The tax figures are a leading indicator of growth rates. The growth of tax paid by the top 100 companies eased by 11% over that of last year.