Investors at first had warmed to a one-half percentage point cut in interest rates by the US Federal Reserve, the European Central Bank, the Bank of England and other key central banks around the world, the first co-ordinated move since the September 11, 2001, attacks.
But confidence was short-lived, and the price of government debt, stocks and crude oil swung wildly. Short-dated euro zone government bonds rallied and gold held onto strong gains as investors fled to safe-havens. The benchmark FTSEurofirst 300 index of top European shares, after falling nearly 8 percent in early trade, recouped most of its losses after the rate cuts only to slide anew.
Keeping investors on edge were credit markets, which remained tight despite the co-ordinated effort to pry them open. The yen surged broadly to its highest level in three years against the euro as fears widened that co-ordinated central bank effort may not be sufficient to thaw frozen credit markets.
The euro also tumbled 1.1 percent to 136.16 yen, after falling as low as 134.20 yen, the lowest level since August 2005. With financial markets awash with signs that credit is expensive and hard to come by, investors also sold off banking shares on both sides of the Atlantic.
Alcoa Inc reported a lower-than-expected profit late on Tuesday and said it was halting major capital projects in the face of uncertain markets. Its shares slumped 13 percent to $14.54. The Dow Jones industrial average rose 99.08 points, or 1.05 percent, to 9,546.19, while the Standard & Poor's 500 Index was up 17.78 points, or 1.78 percent, at 1,014.01. The Nasdaq Composite Index was up 36.32 points, or 2.07 percent, at 1,791.20.
In Europe, the FTSEurofirst 300 closed down 6.3 percent at 940.78 points, its lowest close since December 2003. The index has lost 13.6 percent this week. The banking sector took the most points off the index, with Anglo Irish Bank sliding 15.6 percent, Deutsche Bank falling 10.7 percent and Banco Santander down 5.8 percent.
Some British financial shares rose, however, after Britain announced a multi-billion pound rescue package for banks that included plans to inject up to 50 billion pounds of government money into the country's biggest operators. Despite the flight to safety, US Treasury prices fell after two auctions totalling $16 billion.
The benchmark 10-year US Treasury note fell 56/32 in price to yield 3.72 percent, and the 2-year US Treasury note fell 11/32 in price to yield 1.64 percent. The dollar fell against major currencies, with the US Dollar Index off 0.55 percent at 80.674. The euro rose 0.70 percent at $1.3712, and against the yen, the dollar fell 1.36 percent at 99.95.
Oil prices fell on worries that demand will fall due to a weakening global economy and on rising US inventories. US light sweet crude oil fell $1.98 to $88.08 a barrel. Spot gold prices rose $19.50 to $906.10 an ounce. How much the rate cuts will allow troubled banks to improve their balance sheets and keep businesses humming was unclear. In Asia, the Nikkei plunged 9.4 percent in its biggest one-day drop since the 1987 stock market crash, on fears of a global recession. The MSCI Asia-Pacific index of stocks outside Japan tumbled 7 percent, dragged down by the global financial panic.
CENTRAL BANKS CUT RATES: Central banks around the world cut interest rates in unison on Wednesday in a joint response to the global financial crisis, giving a boost to battered stock markets. The Fed said it was cutting its key federal funds rate by 50 basis points to 1.5 percent. China, the European Central Bank (ECB) and central banks in Britain, Canada, Sweden and Switzerland also cut rates in the co-ordinated response which analysts had been demanding.
Before the rate cut, stock markets across the world had continued their downward spiral amid the worst financial crisis in nearly 80 years and fears of a global recession.
The cuts followed days of calls for concerted action by economists and world leaders after repeated attempts by central banks to inject liquidity into world markets failed to halt a crisis of confidence. "The central banks of the world have finally woke up to the gravity of the current situation," said Charles Diebel, the head of interest rates strategy at Nomura. "This is a major step to convincing the world that they are serious about stabilising." Britain had earlier offered to pump at least 50 billion pounds ($87.2 billion) into its biggest retail banks to help them survive the crisis.
British Prime Minister Gordon Brown said the global financial market had ceased to function after bad debts stemming from a collapse in the US housing market poisoned the system.
Hong Kong had earlier followed Australia's lead in slicing a full point off its interest rates amid increasingly strident calls for a co-ordinated, global monetary policy response. The Bank of Japan, which did not join the world's central banks' co-ordinated rate cuts, said it will study ways to improve its market operations to enhance stability of financial markets.