Aussies Pull The Rate Cut Trigger

The Royal Bank of Australia cut that country's central bank lending rate 100 bp from 7% to 6%, prompting a flurry of speculation that other central banks will follow suit as soon as today with their own major rate slashing actions.

Australia slashed its benchmark interest rate by the most since 1992 and central banks pumped more than $480 billion into money markets as policy makers tried to staunch the worsening financial crisis.

Australia's central bank lowered its key rate by one percentage point to 6 percent, twice as much as economists forecast. The European Central Bank and its counterparts provided extra funds one day after the worldwide stock market slide wiped more than $2 trillion off investors' wealth.

The moves failed to stem strains in credit markets that have pushed Iceland's financial system close to collapse and sent European money-market rates to records today. With financial conditions deteriorating, central banks are coming under pressure to follow Australia and cut interest rates.

``There seems a growing chance of emergency ECB and Bank of England easing in the next few days,'' said Michael Saunders, chief western European economist at Citigroup Inc. ``To be sure, early easing, even 50 basis points or more, would not provide a full solution to the current economic and financial crisis.

ECB President Jean-Claude Trichet is scheduled to speak in Evian, France at 3:30 p.m. local time. Fed Chairman Ben S. Bernanke will discuss the economic outlook from 12:30 p.m. in Washington today. They will meet Group of Seven counterparts in the U.S. capital on Oct. 10.

The prospect of global rate cuts and that emergency G7 meeting on Friday has the markets in something of a holding pattern right now. On one hand, rate cuts are sexy short term. On the other hand, Australia's 100 bp cut did dick to the LIBOR, the overnight rocketed back up to 3.9325. The Euribor continues to rise. Nikkei and Hang Seng indexes are still quite wobbly, but Euro markets are posting modest gains this morning on hopes that a rate cut will bleed off the money market pressure.

It's clear investors are looking for concrete, global action now. The money markets are immobile. Iceland nearly went under...not the bank, the country. In response, they nationalized the country's second-largest bank and took a loan on crappy terms from Russia, which in international terms is like taking a payday loan from, well, the mob.

US futures are modestly higher. Global financial analysts are looking for a 50 bp cut from England and Europe and a full 100 bp cut from the Fed...anything less may cause another disastrous Monday. Only the promise of Friday's G7 meeting and the global action it prefaces allowed the Dow to rally and cut its losses in half yesterday. If that hadn't happened, the Dow would have surely tanked by 1,000 points or more. That's how close we came yesterday to a nearly 10% meltdown as the French proposal for the emergency meeting crossed the wires at about 3 PM New York time and the Dow staged a nearly 500 point rally in one hour.

And in all actuality, like venting a steam pipe, a lot of folks were actually looking for a meltdown day like that on the theory that it would have represented a concrete bottom to the market that would have led to a massive rally today. But, that rally came in the last 60 minutes of the trading day yesterday instead, so today looks like a flat day.

It might even be quiet on the markets for the next few days for once as the world awaits Friday's G7 meeting in Washington. European action could come as soon as Thursday, and that could mean a strong day both Thursday and Friday on the markets. The US markets coming out ahead this week is not out of the question at all.

And while the stock markets may pause for a bit, the real problem is that the credit markets are still locked up tight. Action may need to be taken before Friday.

The cost of borrowing in dollars overnight in London jumped as U.K. lenders held talks with the government on emergency funding and Iceland nationalized its second-biggest bank amid an unprecedented credit squeeze.

The London interbank offered rate, or Libor, that banks charge each other for such loans rose 157 basis points to 3.94 percent today, the British Bankers' Association said. The corresponding rate for euros climbed 22 basis points to 4.27 percent, the highest in four days. The Tokyo interbank rate stayed at the highest level this year and the Libor-OIS spread, a gauge of cash scarcity among banks, widened to a record.

``There's still a massive lack of confidence in this market and the more we talk about it, the more it becomes a self- fulfilling prophecy,'' said Jan Misch, a money-market trader in Stuttgart, Germany, at Landesbank Baden-Wuerttemberg. ``Sentiment hasn't improved much and rates remain at elevated levels.''

Nothing the central banks have done so far has made even a dent in the credit markets. The prospect of a global rate cut hasn't budged it.

If whatever coordinated action decided upon by the G7 on Friday and put into place between now and Monday morning in Asia doesn't loosen up the credit markets, this whole stack will blow sky high next week.

We came damned close to Game Over yesterday. We may be in the same situation next Monday too.