Stimulus sparks optimism overnight on world markets

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Optimists returned to equity markets in Europe and on Wall Street with a vengeance after the Bank of Japan cut interest rates and opened the door for more easing by other central banks.

In the US, all three key share markets advanced. The Nasdaq Composite Index jumped 2.2 per cent in early afternoon trading. The Dow Industrial Average was up 1.85 per cent and the Standard & Poor's 500 Index surged 2.08 per cent.

The Stoxx Europe 600 Index climbed 1.3 per cent to 261.18, its biggest gain in at least a month.

In addition to hopes for more global easing efforts, the US economy offered bulls some optimism too.

Faster-than-anticipated growth in the Institute for Supply Management's gauge of service industries fuelled optimism about the US economic recovery. The ISM gauge, which covers 90 per cent of the world's largest economy, rose to 53.2 from 51.5, compared with expectations for a reading of 52.

The real catalyst for equity markets though was the BoJ's move.

The Bank of Japan cut its benchmark interest rate to "virtually zero" and said it would create a 5 trillion yen (US$60 billion) fund to buy government bonds and other assets to support the economy.

Policy makers in the US and the UK were also considering quantitative easing measures.

"You've got central banks globally continuing to use the tools at their disposal beyond simple interest rate policy to stimulate more capital velocity in the system," Craig Peckham, equity trading strategist at Jefferies & Company in New York, told Reuters.

The Fed is expected to detail more asset purchases when its policy committee next meets in early November. In an interview with the Wall Street Journal, Chicago Fed President Charles Evans said he favours "much more accommodation" given the labour market's woeful state.

Despite investors' glee with the prospect of more easing, some cautionary flags are being raised.

Ultra-loose monetary policies by the Fed and the European Central Bank were throwing the world into "chaos" rather than helping the global economic recovery, Nobel Prize winning economist Joseph Stiglitz said on Tuesday.

A "flood of liquidity" from the Fed and the ECB was bringing instability to global foreign exchange markets, Stiglitz told reporters after a conference at Columbia University.

"The irony is that the Fed is creating all this liquidity with the hope that it will revive the American economy," Stiglitz said. "It's doing nothing for the American economy, but it's causing chaos over the rest of the world. It's a very strange policy that they are pursuing."

Still, as has been the case for months now, nothing was going to sidetrack investors today. Feeding into the positive vibe was Moody's Investor Service's comments on Greece's efforts to reform its finances.

Greece's drive to overhaul its public finances has "impressed"

Moody's and if it continues the risk to the country's sovereign rating forecast "is to the upside," Bloomberg News reported, citing comments by Anthony Thomas a London-based senior analyst at the ratings company, at a credit conference in Warsaw today.

The Dollar Index, which measures the greenback against a basket of six major currencies, fell 0.93 per cent to 77.72, an eight-month low.

Spot gold rose US$24, or 1.8 per cent, to US$1,339.05 an ounce at 1734 GMT, after earlier reaching an intra-day record of US$1,341.20.

Industrial metal prices surged in London with copper reaching a two-year high, tin rose to a record high, while zinc, lead, nickel and aluminium all advanced.

The renewed enthusiasm among investors is setting the stage for a solid start to the third-quarter earnings season in the US and may also help check any dismay with the US jobs report on Friday.