Member Article

Markets rally following Central Bank Action

It initially appeared to be another indecisive day in financial markets before equity indices reacted violently to a variety of news reports. After suffering early losses, markets jumped on news that China had cut its bank reserve requirement ratio by 50 basis points (0.5%). The cut, the first for three years, is a sign that China is serious about easing credit condition in a move that is designed to increase the amount of lending. Previously, the country’s banks had to hold 21.5% in cash in an effort to curb lending and cool what was at the time an overheating economy.

Augmenting sentiment in another step was surprise coordinated action from global central banks, the US Federal reserve, the ECB and those in Japan, Canada, Britain and Switzerland cooperating to lower the interest rate on dollar swaps lines by 0.5%. These liquidity lines are provided as an emergency funding facility by for example enabling European institutions to borrow in dollars from the ECB which in turn acquires the dollars from the US Federal Reserve. The move is designed to help European institutions who have found it increasingly difficult to access dollar funding as creditors fret over the peripheral debt exposure of European banks.

The news more than offset concerns, and accompanying share price weakness, in the banking sector where a handful of stocks were previously under pressure following a downgrade by Standard & Poor’s. The news lifted risk assets across the board, commodities and their mining equities boosted as money fled the safe heaven government bonds.

Top performers on the FTSE 100 were unsurprisingly banks and miners, with one exception they populated the top 10 positions on the leader board. The index itself finished up 168.4 point (3.2%) to finish at 5505, with the US indices up around 3.5% at the time of writing.

This was posted in Bdaily's Members' News section by John Dance .