(Kitco News) - The coordinated liquidity injection by the world’s central banks to make it easier to access dollars lifted financial markets on Wednesday and underscored the seriousness of the European sovereign debt situation on the continent’s banks.
The operation by the banks could be a signal that more quantitative easing by the Federal Reserve may be in the offing, but market watchers said if this were to occur, it would have to be during the first quarter of 2012.
In a coordinated move by the U.S. Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan and the Swiss National Bank, the central banks will lower the pricing on existing temporary U.S. dollar liquidity swap arrangements by 50 basis points, which will help European banks access dollars. According to a news story on MarketWatch, the cost of swapping euros for dollars via a one-month cross-currency basis swap rose to its highest level in three years on Tuesday.
The surprise move came as China lowered its bank reserve requirement by 50 basis points, which had already helped take the dollar off its high for the day Wednesday and give underlying support to equities. The central bank action built on that strength and sent markets up sharply across the board. The Dow Jones Industrial Average jumped over 400 points when it opened, building on gains first entered electronic trade ahead of day session. Gold is up $30 an ounce at $1,750 and the euro is gaining on the dollar.
Another support for the markets came from a much-stronger-than-expected private-payroll report from ADP. The report showed an increase of 206,000 jobs in November, much higher than expected, with October’s figure revised up to 130,000 from 110,000. Many look to ADP’s figure for a hint of what the U.S. Labor Department’s monthly nonfarm payroll data will show. That report is slated for release Friday.
“The central banks came to the rescue with their fire hose. If there was one thing they learned from 2008… it was the need for liquidity. Bank liquidity in Europe was getting very tight. For the time being we’ve solved a problem…. It’s curing a symptom, but not the disease,” said Sterling Smith, commodity trading adviser and market analyst with Country Hedging.
Smith said this move by the central banks could keep at bay those traders who might have wanted to short stock index futures since it reintroduces the uncertainty of interventions to prop up the market. This is particularly the case since Thursday is Dec. 1 and December is a notoriously light volume month, he said.
He also thinks this move is “extremely bullish” for gold. “It’s inflationary because it’s counter-recessionary. That extra liquidity in the market will look for a home and some of it will find its way into the markets. It’s ‘risk-on,’ so gold benefits,” he said.
Other beneficiaries are commodities with strong internal fundamental stories such as coffee and cattle. Commodities with weak internal fundamental outlooks are not likely to benefit, such as sugar and cotton. He noted that copper is up, but that’s more because of the Chinese reserve cut that anything else.
Markets are still basking in the liquidity flush by the central banks, but not everyone thinks the gains will last.
“The lower rates are a temporary support to the ‘risk-on’ trade. It’s helping the stock index futures and the commodity markets. But I think it will only last a few days before reality sets in and all the markets will reverse and head for new lows. This is just another temporary fix,” said Alan Bush, senior financial futures analyst at Archer Financial Services.
Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said the move by the central banks is “noteworthy” but may not go far enough to really deal with the European situation. Chandler said it may address some funding pressure, but “forces on the other side seem stronger still.” He said downgrades – such as the broad downgrades Standard & Poor’s issued to 15 banks Wednesday – and asset sales and credit line reductions all point to persistent funding challenges. Plus, he said there may be a stigma to access those lines.
“More valuable than the cut in the swap rate today would have been follow through on the European promise for an EU-wide bank guarantee scheme like they had in 2008-2009,” he said.
MORE QUANTATIVE EASING TO COME?
Even prior to the central banks’ efforts, there have been some murmurs in the markets of another sort of policy accommodation by the Federal Reserve to help keep the nascent U.S. economic growth from stalling. Just Tuesday San Francisco Bank Fed President Janet Yellen cited the “urgency of strengthened international policy cooperation” to support global economic growth and gave more hints of possible Fed action.
Wednesday’s action has just bolstered the view that the Federal Reserve may come out with another accommodative policy. But neither Smith nor Bush thinks it will be as soon as the next Federal Open Market Committee meeting, which is set for Dec. 13. Instead, the first quarter of 2012 is likely if anything were to happen.
“I think this move (by the central banks) is a hint of QE3, but the window closes quickly to do anything. The Fed won’t want to do anything close to the (presidential) election as not to appear political. December is too soon as (Wednesday’s action) needs time to run,” Bush said.
Smith said the Fed is probably “on the precipice” of some sort of accommodation and he said he won’t be surprised if it was some sort of program to help the mortgage market. Again, he said the Fed will wait until the first quarter of 2012 before launching anything, especially since it just started the Home Affordable Refinance Program. HARP allows home owners who owe more than their houses are worth but have been consistent on paying their mortgages to take advantage of lower loan rates. “It’s a government program that may actually do right for a change,” he said.
The Fed may wait to see to how many people take advantage of the program before buying up mortgage-backed securities to keep the longer-dated rates low, he said, which is why he said the Fed may wait until next year if it plans to act.
By Debbie Carlson of Kitco News dcarlson@kitco.com
The operation by the banks could be a signal that more quantitative easing by the Federal Reserve may be in the offing, but market watchers said if this were to occur, it would have to be during the first quarter of 2012.
In a coordinated move by the U.S. Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan and the Swiss National Bank, the central banks will lower the pricing on existing temporary U.S. dollar liquidity swap arrangements by 50 basis points, which will help European banks access dollars. According to a news story on MarketWatch, the cost of swapping euros for dollars via a one-month cross-currency basis swap rose to its highest level in three years on Tuesday.
The surprise move came as China lowered its bank reserve requirement by 50 basis points, which had already helped take the dollar off its high for the day Wednesday and give underlying support to equities. The central bank action built on that strength and sent markets up sharply across the board. The Dow Jones Industrial Average jumped over 400 points when it opened, building on gains first entered electronic trade ahead of day session. Gold is up $30 an ounce at $1,750 and the euro is gaining on the dollar.
Another support for the markets came from a much-stronger-than-expected private-payroll report from ADP. The report showed an increase of 206,000 jobs in November, much higher than expected, with October’s figure revised up to 130,000 from 110,000. Many look to ADP’s figure for a hint of what the U.S. Labor Department’s monthly nonfarm payroll data will show. That report is slated for release Friday.
“The central banks came to the rescue with their fire hose. If there was one thing they learned from 2008… it was the need for liquidity. Bank liquidity in Europe was getting very tight. For the time being we’ve solved a problem…. It’s curing a symptom, but not the disease,” said Sterling Smith, commodity trading adviser and market analyst with Country Hedging.
Smith said this move by the central banks could keep at bay those traders who might have wanted to short stock index futures since it reintroduces the uncertainty of interventions to prop up the market. This is particularly the case since Thursday is Dec. 1 and December is a notoriously light volume month, he said.
He also thinks this move is “extremely bullish” for gold. “It’s inflationary because it’s counter-recessionary. That extra liquidity in the market will look for a home and some of it will find its way into the markets. It’s ‘risk-on,’ so gold benefits,” he said.
Other beneficiaries are commodities with strong internal fundamental stories such as coffee and cattle. Commodities with weak internal fundamental outlooks are not likely to benefit, such as sugar and cotton. He noted that copper is up, but that’s more because of the Chinese reserve cut that anything else.
Markets are still basking in the liquidity flush by the central banks, but not everyone thinks the gains will last.
“The lower rates are a temporary support to the ‘risk-on’ trade. It’s helping the stock index futures and the commodity markets. But I think it will only last a few days before reality sets in and all the markets will reverse and head for new lows. This is just another temporary fix,” said Alan Bush, senior financial futures analyst at Archer Financial Services.
Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said the move by the central banks is “noteworthy” but may not go far enough to really deal with the European situation. Chandler said it may address some funding pressure, but “forces on the other side seem stronger still.” He said downgrades – such as the broad downgrades Standard & Poor’s issued to 15 banks Wednesday – and asset sales and credit line reductions all point to persistent funding challenges. Plus, he said there may be a stigma to access those lines.
“More valuable than the cut in the swap rate today would have been follow through on the European promise for an EU-wide bank guarantee scheme like they had in 2008-2009,” he said.
MORE QUANTATIVE EASING TO COME?
Even prior to the central banks’ efforts, there have been some murmurs in the markets of another sort of policy accommodation by the Federal Reserve to help keep the nascent U.S. economic growth from stalling. Just Tuesday San Francisco Bank Fed President Janet Yellen cited the “urgency of strengthened international policy cooperation” to support global economic growth and gave more hints of possible Fed action.
Wednesday’s action has just bolstered the view that the Federal Reserve may come out with another accommodative policy. But neither Smith nor Bush thinks it will be as soon as the next Federal Open Market Committee meeting, which is set for Dec. 13. Instead, the first quarter of 2012 is likely if anything were to happen.
“I think this move (by the central banks) is a hint of QE3, but the window closes quickly to do anything. The Fed won’t want to do anything close to the (presidential) election as not to appear political. December is too soon as (Wednesday’s action) needs time to run,” Bush said.
Smith said the Fed is probably “on the precipice” of some sort of accommodation and he said he won’t be surprised if it was some sort of program to help the mortgage market. Again, he said the Fed will wait until the first quarter of 2012 before launching anything, especially since it just started the Home Affordable Refinance Program. HARP allows home owners who owe more than their houses are worth but have been consistent on paying their mortgages to take advantage of lower loan rates. “It’s a government program that may actually do right for a change,” he said.
The Fed may wait to see to how many people take advantage of the program before buying up mortgage-backed securities to keep the longer-dated rates low, he said, which is why he said the Fed may wait until next year if it plans to act.
By Debbie Carlson of Kitco News dcarlson@kitco.com
