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New Zealand stocks and the kiwi dollar got a leg up on news the US government is to bail out mortgage giants Fannie Mae and Freddie Mac.
But local gains were dwarfed by the strong surge on the Australian and Asian markets.
The US Treasury said it would seize control of Fannie Mae and Freddie Mac, which own or guarantee about half of US mortgage debt, using a system know as "conservatorship". The bailout could be the biggest ever and removes a big cloud that had been weighing on global markets.
The New Zealand dollar, which touched a fresh 22-month low below US66c early on Friday, opened at US67.49c yesterday and was trading at US68.20c by the local close.
On the sharemarket the NZX-50 index rose as high as 3383.91 but eased as the day wore on, closing up 38 points, or 1.15 per cent, at 3374.40.
Apart from a handful of dual-listed Australian entities, the New Zealand sharemarket has no large banks or financial institutions and it is these types of companies that have been hit particularly hard by the credit crunch and which responded strongly to the news of the US move.
In Australia the ASX-200 soared 3.9 per cent with banks benefiting most. The ANZ Banking Group rose A$1.34, or 8.24 per cent, to A$17.60 while the National Australia Bank rose A$1.50, or 6.36 per cent, to A$25.10.
Both the ANZ and NAB have been hit hard by the credit crunch and by related balance sheet writedowns which have been tipped to continue.
Asian markets were even more energised by the US news. Japan's Nikkei 225 stock index closed up 412.23 points, or 3.4 per cent, at 12,624.46, and Hong Kong's Hang Seng closed up 4.3 per cent at 20794.27 last night.
In early trading in Britain, the FTSE 100 was up 3.6 per cent.
The US government action was the latest in a series of emergency steps taken by authorities to quell what is now a year-long credit market crisis that has helped push many economies toward recession. "Our economy and our markets will not recover until the bulk of this housing correction is behind us," US Treasury Secretary Henry Paulson said.
Fannie Mae and Freddie Mac, which own or guarantee US$5.3 trillion ($7.77 trillion) in outstanding home mortgage debt, were so large that "a failure of either of them would cause great turmoil in our financial markets here at home and around the globe", Paulson said.
The congressionally chartered companies, the two largest sources of US housing finance, have suffered combined losses of nearly US$14 billion in the last four quarters and large holders of their debt, including overseas central banks, have been increasingly jittery about their health.
Japan, the world's second biggest economy flirting with a recession, said the US move should help the global economy.
"Japan welcomes the step as it removes one unstable factor in the United States, especially because the dollar is a key international agency," Finance Minister Bunmei Ibuki said.
While Asian markets soared yesterday, US bond futures and US Treasuries fell sharply as it raised concerns the Government might have to borrow more. The benchmark 10-year yields jumped 19 basis points to 3.9 per cent as the new trading week opened in Asia.
The US dollar rose against the yen but slid against the euro.
As part of the rescue plan, the Treasury is taking an equity stake in the companies, will purchase mortgage-backed securities they issue and will extend a credit line to them.
In addition, the top executives were ousted. Freddie Mac chief executive Richard Syron and Fannie Mae's CEO Daniel Mudd were replaced by David Moffett, a former top official at US Bancorp, and Herb Allison, a former top official at both Merrill Lynch and pension fund TIAA-CREF.
The Treasury Department said the ultimate cost of the plan would depend on how well the companies perform. In July, congressional budget analysts estimated a rescue would likely cost taxpayers US$25 billion.
The proposals, less than two months away from the US election, leave the ultimate fate of Fannie Mae and Freddie Mac in the hands of the next president. Democratic presidential contender Barack Obama said it would be necessary to clarify whether they are truly public companies or special entities that investors feel they can put money in risk-free.
A senior adviser to Republican presidential nominee Senator John McCain described them as examples of "crony capitalism".
Federal Reserve Chairman Ben Bernanke strongly endorsed the action. "These necessary steps will help to strengthen the US housing market and promote stability in our financial markets," he said.
Mortgage giants:
Fannie Mae and Freddie Mac are shareholder-owned companies set up by the US Congress to provide funding to the housing market.
Fannie Mae is short for Federal National Mortgage Association, Freddie Mac short for Federal Home Loan Mortgage Corporation.
Fannie Mae was founded in 1938 due to a lack of mortgage funds. It was a government agency until 1968. Freddie Mac was created in 1970 to provide competition to Fannie Mae.
The two firms don't lend directly to homebuyers. They buy mortgages from approved lenders and then sell them on to investors.
Fannie and Freddie between them account for US$5.3 trillion,or about half the US mortgage market. Almost all US mortgage lenders rely on them.
The two companies have suffered combined losses of nearly US$14 billion in the past year.
Boost for shares:
New Zealand: NZX-50 up 1.15 per cent at 3374.40.
Australia: ASX-200 up 3.9 per cent at 5067.5.
Hong Kong: Hang Seng up 4.3 per cent at 20794.27.
Japan: Nikkei up 3.4 per cent at 12,624.46.
England: FTSE 100 surges 3.6 per cent in early trading last night.
- ADDITIONAL REPORTING BY AGENCIES
