First Cut Is The Deepest

To paraphrase Rod Stewart's song.

The FOMC surprised everyone by cutting the Fed Funds rate by 1/2% instead of the widely expected 1/4%. The US market reacted by rising 335. HK opened up 900 and at one stage was up over 1,000. The market closed at 25,555 up 977 on heavy turnover of HK$138.7 billion.

The Fed moved aggressively in the first rate cut in 4 years sending out a very strong signal that it will do what is necessary to stop the sub prime woes from spilling into the broader market. The issue is one of moral hazard. Should the Fed bail out those financially irresponsible who put us into this mess in the first place. At the end, it was a no brainer. The Fed cannot afford to penalise the entire economy by punishing the irresponsible. Besides, a 1/2% cut will not bail out those who borrowed 100% at teaser rates and are now seeing their rates re-set to double.

The "Bernanke Put"? Not! However, the Fed also cut the discount rate by 1/2% to 5.25% in a bid to provide more liquidity to the market to facilitate roll overs of commercial papers.

Asian stocks and currencies surged in response to an aggressive Federal Reserve interest-rate cut, as the U.S. central bank moved to limit the risk of an economic downturn.

Market Indices
Australia All Ordinaries 6362.00 + 2.48%
Bombay Sensex* 16304.32* + 4.05%
Hong Kong Hang Seng 25554.64 + 3.98%
Japan Nikkei 16381.54 + 3.67%
Shanghai Composite 5395.26 - 0.55%
Singapore STI 3594.36 + 3.35%
South Korea Composite 1902.65 + 3.48%
Taiwan Weighted 8926.38 + 0.30%

* Intraday trading