The simultaneous rate cut by 11 European nations last week could boost U.S. bank shares in the weeks ahead.
Analysts and economists said lower rates in Europe will help U.S. banks doing business there, may make it easier for European institutions to buy banks here, and could prompt the Federal Reserve to follow suit with a new rate cut.
J.P. Morgan & Co., Citigroup, and Chase Manhattan Corp. could be among the direct beneficiaries of the coordinated action that reduced a benchmark short-term rate to 3% across much of Europe, said bank analyst Lawrence W. Cohn of Ryan, Beck & Co., Livingston, N.J., because they have large European trading operations.
When interest rates go down, the value of financial assets rises. "The bigger picture is that at least two-thirds of the world is being managed on the basis of lower interest rates," Mr. Cohn said, "and this moderate attempt to stimulate the economy has brought the risks down for all banks."
Investors could also be more optimistic about bank stocks because the rate cut could pave the way for big international mergers, some market experts said.
"The thinking is, because Europe's interest rates are 150 basis points lower than interest rates in the United States, European corporations can acquire U.S. corporations at lower prices," said Mr. Cohn.
Scott Brown, an economist at Raymond James & Associates, St. Petersburg, Fla., said some investors may think that the European rate cuts could pressure the Federal Reserve to cut U.S. interest rates again.
"Cuts in Europe just by themselves normally make the dollar a bit stronger," giving the Fed a reason to cut rates, he said. But Mr. Brown added that investors are more probably pinning their hopes on recent turbulence in Latin America to prompt another rate cut.
Indeed, concerns about foreign economies bloomed afresh last Thursday after Brazil's Congress struck down a tax measure that would have helped reduce the country's budget deficit. This action could also deter the International Monetary Fund from signing off on the loan package Brazil so desperately needs to bolster its economy.
Thomas Carpenter, chief economist at ASB Capital Management, said the Fed is likely to cut interest rates but not because of what happened in Europe.
Central banks in the United States and Europe "have been, and are, trying to put a floor underneath the global economy and credit markets of the world," said Mr. Carpenter. "So it is not a matter of if they are going to cut interest rates; it's when."
Most economists expect another Fed rate cut in the first quarter.
