Australia cuts rates, glimmers of hope from banks

Australia cut interest rates sharply on Tuesday, presaging likely reductions in Europe later this week, and evidence of recession mounted despite glimmers of hope from major banks.

For investors, the worst financial crisis in 80 years has all but eclipsed Tuesday's U.S. presidential election although the result may offer some market relief with the promise of more fiscal stimulus.

Whether Democrat Barack Obama or Republican John McCain wins, he will face a huge challenge in reviving the world's largest economy, which is already contracting.

Australia's bigger-than-expected 75 basis point rate cut followed cuts in the United States, China and Japan last week. Britain and the euro zone are expected to follow suit on Thursday with half point reductions, or maybe more.

The recession that central banks and governments around the world have tried to ward off with trillions of dollars in bank bailouts, liquidity pumped into frozen money markets and economic pump-priming measures, looms ever larger.

The Australian central bank said there was "significant weakness" in major industrial economies in explaining why it cut rates to 5.25 percent, the lowest since March 2005.

"Each of the big developed economies now is either in a severe recession or well on the way," said Rory Robertson, interest rate strategist at Macquarie in Sydney.

There were glimmers of better news from banks.

UBS AG, one of Europe's hardest-hit banks, said accounting effects would weigh on fourth quarter results but it had seen some encouraging signs in client flows in October.

Royal Bank of Scotland, which is taking 20 billion pounds of emergency UK government funds, reported a lower-than-expected writedown of 206 million pounds ($334 million) for toxic assets in the third quarter, although it said tough markets would have an adverse effect on full-year results.

U.S. ELECTION BOUNCE?

Obama leads McCain in five of eight key battleground states as Americans prepare to vote in the White House race, according to a series of Reuters/Zogby polls released on Tuesday.

Experts say trends could become clear soon after the first polls close at 2300 GMT in Indiana.

Obama advocates a second stimulus package to jump-start the U.S. economy. Valued at $175 billion, the plan would include funding for infrastructure and another round of tax rebates.

McCain advocates a $300 billion housing plan that would use some of the funds from the recent $700 billion Wall Street bailout package to buy up troubled mortgages.

"Depending on the actual results, the U.S. election may provide some support to markets globally as it may be seen as the promise of more fiscal stimulus, particularly if Obama wins," currency strategists with Calyon in Hong Kong said.

Money market rates declined in Asia, indicating a gradual easing in the strains of the credit crisis. But analysts said that still reflected central bank efforts to add liquidity rather than commercial banks lending to each other.

The credit crunch, which stemmed from a collapse in the U.S. housing market, has prompted banks to clam up on lending to each other, businesses and households for over a year now.

RECESSION A REALITY

Synchronised rate cuts by central banks and emergency government packages worth some $4 trillion may have prevented a banking sector meltdown but the world economy is in poor shape.

Fears about the shrinking U.S. economy knocked stock markets on Tuesday, with Asia-Pacific stocks falling 0.8 percent. [ID:nL4380534]. European stocks were virtually flat.

U.S. vehicle sales plunged in October, with General Motors Co down 45 percent, Ford Motor Co off 30 percent and Toyota Motor Co down 23 percent.

Marks & Spencer Plc, Britain's biggest clothing retailer, posted a 34 percent drop in first-half profit, hit by a deepening consumer downturn.

The European Commission said the 15-nation euro zone was in a technical recession and economic growth would come to a virtual standstill next year.

South Korea, which has announced an $11 billion stimulus package to bolster its economy, said a $4 billion currency swap deal with neighboring China would likely be expanded.

Policymakers were set to gather again to plot their next moves. Euro zone finance ministers meet on Tuesday in Brussels to discuss reform of institutions that manage the global financial market and bodies such as credit rating agencies, accounting rules-setters, banks and their management.

"We can no longer trust self regulation on financial markets. Both supervisors and regulators have to take responsibility," Dutch Finance Minister Wouter Bos said in Brussels. "That's something to be achieved in Washington."

Washington will host a summit of world leaders on November 15 to chart a way out of the crisis. The president-elect will attend.