Wall Street posted a positive turnaround on Thursday trading - following a week of bloodshed in confused sharemarkets around the world - with the possibility of a US Government-led bailout of debt-laden companies under threat of bankruptcy.
However, whether the improved sentiment and day-long check in panic selling by investors takes root permanently remains to be seen.
A report that US Treasury secretary Henry Paulson was considering forming an entity to take over bad mortgage debts and manage the problem with a new taxpayer-funded entity had left investors "ebullient" and prompted a huge market turnaround on Thursday, Associated Press reported.
While an $85 billion US Government-funded bailout of giant insurer American International Group earlier in the week appeared to have only thrown the marketplace into more confusion, the treasury proposal was underpinned by 10 central banks around the world chipping in $250 billion to assist with market liquidity.
ABN Amro Craigs broker Peter McIntyre said the $250 billion fund and treasury proposal were positive and added some stability to the US marketplace, but he cautioned it was too early to pronounce "problem solved".
"There are plenty in the market that want to see these [troubled US] companies left to stand on their own - or fall. That is the type of certainty they want," he said.
Forsyth Barr broker Suzanne Kinnaird said there had been a "crisis of confidence" spawned by the US turmoil and followed by markets around the world.
Australia's ASX All Ords index yesterday retraced losses of the day before and was up 3.5%, likely assisted by proposals to review short-selling strategies by regulators in the US and UK, she said.
"The market was positive and moves in the US were welcomed. But it's got a long way to go before the market's back on track," she cautioned.
In Wednesday's trading, the Dow Jones index plummeted more than 4%.
However, following the Thursday news of the $250 billion fund and the treasury proposal, the three main US indices booked their largest one-day percentage gains in six years, with the Dow Jones industrial average up 3.86%, the Standard and Poors 500 index up 4.33% and Nasdaq Composite tech index up 4.78%.
New York's Friday trading had not resumed at 5pm New Zealand time yesterday, but the indicative Dow Jones Futures Index was positive and up about 1.8% at the time.
Similarly, on Thursday the New Zealand stock exchange dived almost 4% and lost $1.3 billion in value, its biggest drop in just over seven years.
Yesterday, it rallied about 1% and, on closing at 5pm, the SE 50 index was up at 3187.13, having possibly been affected by news yesterday of the widening of the overseas-funded current account deficit, Mr McIntyre said.
He said the $250 billion fund would be used to "shore up" the US investment banks with significant "counterparty risks" - where settlement on a transaction is not honouredMr McIntyre criticised the stance of the Reserve Bank of New Zealand, saying if it did not act aggressively now to cut the interest-driving official cash rate to 5%-5.5% to stimulate economic growth, it would be too late for the economy to achieve a "soft landing", as widely predicted, when the recession began to bite.
"The recession could be more pronounced and longer than predicted. They [Reserve Bank] have got to be aggressive," Mr McIntyre said.
The Reserve Bank had held the OCR at the highest levels in the developed world for the past two years, initially to quell increased spending emanating from the housing boom, but is now more focused on containing inflation, which has pushed beyond its preferred outer limit of 3%.
The US Treasury proposal is to set up a new entity similar to the Resolution Trust Corp (RTC) which operated during the savings and loan crisis of the late 1980s and early 1990s which liquidated almost $400 billion of assets.
There is also talk of government cash going into ailing private companies or towards the refinancing of US mortgages to prevent more foreclosures, which, with the housing slump, are standing at record levels.
Mr McIntyre said the United States Banking Association, which held $1.5 trillion in an insurance fund for the entire US banking and investment banking sector, was coming under pressure to act.
During the '80s and '90s loan crisis, it had 1200 banks on credit watch, but now had only 125, and needed to make a clearer distinction between the operations of trading banks and investment banks.
Investors hoped a huge federal intervention could help financial institutions jettison bad mortgage debt and stop the drain on capital that has already taken down companies including Bear Stearns and Lehman Brothers, AP reported.
The director of derivatives investment strategy for WJB Capital Group in New York, Scott Fullman, said bear markets were very sensitive to news.
"And on a scale of 1 to 10, this one is a 13," he saidWorries about financial landmines on companies' books have hobbled the world's financial markets and led to the intense volatility in the markets this week.
"It's going to take a lot of the bad debt off the balance sheets of these companies," Mr Fullman said of the possibility of an entity akin to the RTC.
It could alleviate many of the pressures causing the credit crisis and open up the credit markets again, he said.
