Europe Stocks, U.S. Futures Rise on Fed's Commercial Paper Plan

By Michael Patterson

Oct. 7 (Bloomberg) -- European stocks and U.S. index futures rose on speculation the Federal Reserve's plan to buy commercial paper will unlock the credit markets used by companies to finance their daily operations.

Total SA rallied 5.4 percent as oil climbed for the first time in five days on increased bets that central banks around the world will cut interest rates. Europe's Dow Jones Stoxx 600 Index dropped as much as 1.6 percent earlier on concern banks need more capital, then rallied as Barclays Plc and Royal Bank of Scotland Group Plc said they didn't request investments from the U.K. government and Deutsche Bank AG said it doesn't plan to sell shares.

The Stoxx 600 added 1.5 percent to 245.04 at 2:09 p.m. in London. Futures on the Standard & Poor's 500 Index added 1.6 percent. The MSCI Emerging Markets Index dropped 1.1 percent, while the MSCI Asia Pacific Index fell 1 percent.

The Federal Reserve Board, invoking emergency powers, will create a special fund to backstop the U.S. commercial paper market in an effort to support the financing needs of corporations. The Fed said it will lend against a special purpose vehicle at the targeted federal-funds rate. The unit will purchase from eligible issuers three-month dollar- denominated commercial paper at a spread over the three-month overnight-indexed swap rate, according to a press release today.

Europe's Stoxx 600 tumbled the most since 1987 yesterday as bank bailouts spread and falling commodities dragged down raw- materials producers. The Dow Jones Industrial Average dropped as much as 800 points in New York, then recouped more than half its losses in the final 75 minutes of trading on speculation the Federal Reserve will lower rates.

2008 Decline

The Stoxx 600, down 33 percent this year, was valued at 10.05 times the reported earnings of companies in the index yesterday, the cheapest since Bloomberg began compiling the data in January 2002. The MSCI World traded at 12.83 times profit yesterday, the cheapest since at least January 1995, while the S&P 500 trades for 20 times earnings. The emerging markets gauge was valued at 9.48 times earnings.

The London interbank offered rate, or Libor, that banks charge each other for overnight loans in dollars rose 157 basis points to 3.94 percent today, the British Bankers' Association said.

The seizure in credit markets prompted Iceland's Financial Supervisory Authority to take control of Landsbanki Islands hf, the nation's second-biggest lender, and the nation's central bank gave a 500 million-euro ($680 million) loan to Kaupthing Bank hf, the largest.

To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net.