The FOMC cut 0.5% from both the federal funds and discount rate on Tuesday, a positive surprise, resulting in a strong move to the upside for stocks. The Dow Jones Industrial Average gained 2.5% to 13,739.39, Nasdaq rose 2.7% to 2,651.66 and the S&P 500 climbed 2.9% to 1,519.78.

Nikkei 225 December futures trading in Chicago gained 295 points, +1.8% to 16,300. iShares MSCI Japan Index ETF (EWJ) reversed early weakness to gain more than 1.0% to $13.65. The yen weakened nearly a percent against the dollar, last trading above the 116 level.

Among ADRs, Canon (CAJ) jumped 4.7% to $54.19, TDK +4.5% to $87.27, Makita (MKTAY) +4.1% to $38.43 and ORIX (IX) +4.0% to $102.60. Mega banks Mitsubishi UFJ FG (MTU) -1.3% to $8.86 and Mizuho FG (MFG) -3.8% to $10.85, traded to the downside following weakness in financial stocks on Monday in Tokyo. Mitsubishi UFJ was also hurt by a $30 million-plus fine levied on its Union Bank (UB) wholly-owned subsidiary for money-laundering controls violations.

We have mixed feelings about the 0.5% cuts by the FOMC. The underlying problems related to subprime, credit liquidity and surplus real estate seemingly won’t simply disappear because of the cuts. We question the FOMC’s credibility and ask what happens when the aforementioned matters resurface. Risk-taking among U.S.-based investors, especially hedge funds, is likely to return thanks to the rate cuts. While this will improve liquidity concerns, it begs the question of whether the Fed should have let the market work out its problems. The declines in U.S. residential real estate values and increased difficulty in refinancing — if even possible due to previous refinancing and/or declines in value — mean the rate cuts have little meaning, aside, perhaps for consumer credit rates, for individuals. Keep an eye on the U.S. labor market.