Fed Steps in as Central Banks Worldwide Take Action

Joel Anderson  |

Markets spiked today on news that the Central Banks of the United States, Canada, England, Japan, Europe, and Switzerland are taking a coordinated action to improve liquidity in global financial markets. Gains for the S&P 500, Dow Jones Industrial Average, and Nasdaq all gained close to 3.5 percent as optimism about an end to market turmoil fueled a buying spree.

The efforts by the Central Banks extends a pre-existing agreement from May of 2010 to make dollars available to Central Banks for loans, while slashing the borrowing rate by 0.6 percent. This coordinated action should make it easier for Central Banks everywhere to make short-term loans to commercial banks and each other, freeing up more liquidity around the globe, while also improving the availability of dollars to European banks. The move, seen largely as a reaction to rising bond yields in Europe, could be seen as a concerted effort by the world's biggest financial players to respond to the European debt crisis. "The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," said a statement issued by the six central banks.

The major financial indices in Europe and America leapt at news or a coordinated effort by the world's biggest banks. Turmoil and volatility has been weighing heavily on the markets for months and today's spike may be a sign that investors believe the Central Banks will be willing to take further action to prevent a financial meltdown. “The markets are breathing a sigh of relief,” said Stanley A. Nabi, chief strategist for the Silvercrest Asset Management Group. The major European indices all gained between 3 percent and 5 percent pushing stocks higher and posting the biggest three-day gain for global equities since 2009. Among the biggest gainers were, predictably, European banks, as Barclays (BCS) and ING Groep (ING) gained nearly 8 percent while Lloyd's (LYG) and Deutsche Bank (DB) both saw gains close to 8.5 percent.

However, whether this spike is a sign of things to come of a one-time jump isn't clear. Some, like Steven Ricchiuto, chief economist for Mizuho Securities USA, continued to sound bearish about economic progress in the long term. “The apparently decisive turn in the data follows an equally decisive turn to the downside this past summer, which proved to be only temporary,” he wrote in an e-mailed commentary, “and I can see no fundamental reason why the current upside breakout will be any different. Instead, I see this upturn as just one more in a series of false starts.”

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