US shares make stunning recovery

US shares rebounded on Wednesday on fresh hopes that regulators will steer the US economy out of a recession.

All three stock market indexes erased deep losses to end strongly ahead. The Dow Jones rose 2.5% at 12,270.17, while the Nasdaq turned around a 4% decline.

The rally followed news of a plan to bail out bond insurers, which lie at the heart of the financial system. They guarantee about $2 trillion of assets.

Earlier, European stocks fell. The UK's FTSE 100 was down by 3.9% at one point.

Panic has swept through stock markets worldwide on fears that key global economies will enter recession.

Relief rally

On Tuesday, the US Federal Reserve made its biggest rate cut for 25 years to stoke up growth and bolster markets.

However, worries persisted that the move may have come too late, as many firms have already reported lower profits and a worsening business environment.

Another major concern in the US has been the fear that bond insurers embroiled in the sub-prime crisis will not be able to cover their liabilities.

This could force banks to write down further losses on investments backed by crisis-hit sub-prime mortgages.

This meant news of the government plan to inject capital into bond insurers gave fragile confidence in the financial sector a boost, and sent shares in banks, including Citigroup and JP Morgan surging, while technology firms also gained.

The technology-heavy Nasdaq rose 1%, while the wider S&P 500 index also ended ahead, up 2.1%.

But volatility is expected to persist in the coming weeks.

Market movers

Earlier, the UK's FTSE 100 index finished a nerve-wracking session 131 points, or 2.2%, lower at 5,609.3, erasing gains it had made on Tuesday.

Germany's Dax lost 4.9% at 6,439.21, while France's Cac 40 was down 4.3% at 4,636.76.

Shares suffered after the European Central Bank hinted it would not follow the Fed by slashing rates, and analysts said the Bank of England was unlikely to accelerate rate cuts.

"The uncertainty about corporate earnings growth in 2008 has risen, not only in the financial sector," said Matthias Schellenberg, managing director at ING Investment Management.

"The markets are expecting a flood of profit warnings in the next few months."

So far this year, the FTSE 100 has lost more than 13% of its value, wiping about £225bn off the total value of the companies listed on the index.

Germany Dax's index has been one of the worst hit in Europe, down almost 20% this year.

Werner Bader, a stock strategist at LBBW bank, put the falls down to the fact that German firms make most of their earnings overseas, particularly in the US.

"Dax companies are more exposed to the global economy because of their strong exports," he said.

Inflation risks

Despite slowing economic growth on both sides of the Atlantic, the Bank of England and the European Central Bank have insisted on the need to fight inflation, making extensive rate cuts unlikely.

Bank of England governor Mervyn King said that the UK faced its toughest economic challenges since 1997, when the Bank gained independence from the government.

European Central Bank (ECB) President Jean-Claude Trichet told the European Parliament in a speech on Wednesday that price growth was still the ECB's main concern.

"In all circumstances, but even more particularly in demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility in already highly volatile markets," he explained.

Earlier on Wednesday, Japan's Nikkei 225 had closed up 2%, and Hong Kong's Hang Seng added 10.7%.

BBC NEWS