LONDON - European stocks posted modest gains Tuesday ahead of Wall Street's opening on hopes the world's leading central banks will cut interest rates soon, possibly in a coordinated manner to deal with the world financial crisis.
Those hopes, which were fueled by the Reserve Bank of Australia's overnight move to cut borrowing costs by a massive 1 percentage point to 6 percent, helped diminish the impact of another bad day for bank stocks.
Britain's Royal Bank of Scotland Group PLC shed around 40 percent of its value at one stage amid ongoing liquidity and solvency concerns and reports that the government might seek a stake in British banks as a way to boost their balance sheets.
"There's some optimism in the markets in the hope of a global coordinated rate cut, and if it's going to be coordinated there's little reason to wait til Thursday," said Richard Hunter, head of UK equities at Hargreaves Lansdowne.
By afternoon in London, the FTSE 100 index of leading British shares was up 56.23 points, or 1.2 percent, at 4,645.42.
Higher oil prices helped BP PLC and Shell, two of the FTSE's biggest companies, post solid gains, which helped the overall index to recover ground. Oil prices rebounded more than $3 to near $91 in Europe after plunging to an 8-month low Monday on concerns a significant slowdown in global economic growth will undermine demand for crude.
But RBS topped the list of declining issues with a 25.6 percent drop. The bank's shares were down 20 percent on Monday.
In Germany, the DAX index was 2.37 points higher, while the CAC-40 in France, which lost nearly 10 percent of its overall value Monday, was up 1.5 percent.
The Australian central bank's cut was its biggest since 1992 and the scale of it was unexpected. Analysts were predicting a half-point cut, especially after the Australian dollar slumped by nearly 10 percent Monday.
RBA Gov. Glenn Stevens said the Australian central bank had judged that a large cut in the cash rate was needed after studying the outlook for global growth and its likely effect on Australia.
The move sent Sydney's S&P/ASX-200 index, which had opened 3.7 percent lower, up 1.7 percent and helped the Australian dollar push back up above 71.70 U.S. cents. Other markets, including the main indexes in South Korea, Singapore and Taiwan, rebounded after the bold move and market observers said the same could happen if other central banks follow suit.
"The move highlights how central banks' priorities are moving rapidly away from controlling inflation towards supporting growth and averting a deeper economic and financial crisis," said Alvin Pontoh, an analyst at London-based Capital Economics.
"Central banks in the US and Europe — where the growth outlook is markedly worse than in Australia — will be left with little choice but to follow the RBA's lead in the days and weeks ahead," Pontoh said.
The Bank of England is now seen as almost certain to cut interest rates on Thursday, with the questions now being asked are whether it will reduce borrowing costs by half a point to 4.50 percent for the first time in seven years. There has been speculation the Bank of England might join the US Federal Reserve and the European Central Bank in a simultaneous cut.
RBS was not the only British banking stock in trouble amid news reports that the chief executives of Britain's largest banks met up with British Treasury chief Alistair Darling and Bank of England governor Mervyn King Monday night to discuss the possibility of the government providing funding, thought to be around 50 billion pounds in exchange for stakes in the banks.
Lloyds TSB PLC, which is in the process of taking over HBOS PLC, was down 7.8 percent, while Barclays PLC, which has denied it is asking for government funding, was 4.5 percent lower.
Confidence has also drained away in Iceland, which, according to the Prime Minister Geir H. Haarde is facing the prospect of bankruptcy after its banks went on the acquisition trail across the continent, accumulating massive debts in the process.
The government's latest response was to nationalize its second-largest bank Landsbanki under day-old legislation and fixed its currency exchange rate.
The moves came a day after trading in shares of major banks was suspended, the Icelandic krona lost a quarter of its value against the euro, and the government rushed through emergency legislation giving it new powers to deal with the financial meltdown.
Earlier, unlike its Australian counterpart, the Bank of Japan kept its interest rates unchanged at 0.5 percent, as expected.
Japan's benchmark Nikkei 225 index erased some of its early losses to close down 3 percent at 10,155.90 — still its lowest level in almost five years.
Russia's stock markets made early gains after trading opened several hours late Tuesday, a day after suffering steep plunges. The RTS exchange resumed normal trading at 1 p.m. (0900GMT) and was up 2.6 percent to 889.1 points as of 2 p.m (1000GMT). The MICEX, where most trading takes place, rose by 3 percent to 774.5 points. It opened at 1:15 p.m.
The euro was trading at US$1.3574 from US$1.3516 late Monday.