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BD: Interest rate cut fuels sharemarket
 
BUCKING peer pressure from almost every international market, Australian equities staged an unexpected comeback after the Reserve Bank cut interest rates by a full percentage point.

It was the RBA's biggest rate cut since mid-1992 and double what economists had anticipated.

Almost immediately the market, which had partially recovered from a 3.3% drop, pushed into the green. Even resource stocks rose, despite plunging prices, and the S&P/ASX 200 Index closed 78.3 points, or 1.7%, higher at 4618.7.

The result was in contrast with European markets, which dived between 6% and more than 9% on Monday. The Dow Jones also had lost 3.6%, falling below 10,000 points for the first time in four years.

Credit Suisse equity strategist Adnan Kucukalic said the RBA had improved market confidence with a "show of force", providing an example that other central banks should follow.

The speculation may explain the Australian dollar's partial recovery, after sinking back near US70 after the RBA's rate cut.

"The only people who can get that confidence up and running are the central banks," Mr Kucukalic said. "They need to send a message that no matter what happens, we will not allow the economy to get into any depressed state or allow the banking system to fall apart."

But Mr Kucukalic said the sharemarket bounce that followed the rate cut was purely about sentiment.

The materials sector gained, even though an improved outlook for the Australian economy would do nothing to increase demand for copper or iron ore, or push up the price of globally traded commodities, he said.

Commonwealth Bank head of debt research Adam Donaldson said lower interest rates would not directly affect credit markets, which have been frozen for some time. But it would lower the benchmark rate against which every security was priced, lowering funding costs across the board.

Still, market volatility remains at a record, as measured by the Chicago Board Options Exchange.

There is no clear picture about how the US Government's $US700 billion bail-out will work. Russia suspended share trading for the ninth time in less than a month, after a record 19% plunge.

And last night it appeared the British Government might have to invest about 45 billion ($A106.28 billion) in British banks, including the Royal Bank of Scotland (RBS) and Barclays.

RBS sank almost 40% in early trade, after Standard & Poor's lowered its credit rating.

Source