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Global central banks move to stimulate their economies and financial markets yawn (at best)--here's why
07/05/2012 1:10 pm EST
First out of the chute, the Bank of England announced that it would restart its program of buying bonds two months after the central bank stopped its purchases. The Bank of England’s program of quantitative easing will buy 50 billion pounds ($78 billion) in bonds.
Next up, the People’s Bank of China announced a cut to its key benchmark interest rate. The cut, the central bank’s second rate reduction in a month, will lower the one-year lending rate that banks can charge to 6%, a drop of 0.31 percentage points. The one-year deposit rate will fall to 3%. Banks can offer loans at as much as 30% less than the benchmark rate.
And finally, rounding out today’s action, the European Central Bank cut its benchmark interest rate to 0.75%, a 0.25 percentage point reduction. The central bank also cut the rate that it pays banks on overnight deposits to 0% from 0.25%. The theory there is that because banks no longer earn a return to simply keep money on deposit at the central bank, they’ll be more likely to lend to customers seeking financing.
And the reaction in the financial markets?
The U.S. Standard & Poor’s 500 stock index is down 0.31% as of noon in New York. The German DAX index is down 0.45%. The euro is down to $1.2385 against the U.S. dollar, a decline of 1.14%. The yield on Italian 10-year government bonds has climbed back above 6% and the yield on the Spanish 10-year has climbed to 6.8%.
Three reasons for the tepid—or worse—reaction.
First, the moves by both the Bank of England and the European Central Bank were widely anticipated and priced into the financial markets. The move by the People’s Bank was indeed a surprise, but it came with Asian markets already closed. It will be interesting to see if the reaction out of Hong Kong and Shanghai is more positive in tonight’s trading.
Second, traders are seizing on the negatives in the economic assessment by central bankers, especially those by the European Central Bank’s Marie Draghi, to conclude that growth is slipping more than expected, that today’s measures aren’t likely to be enough to turn the situation around, and that more interest rate cuts are in the cards—and soon. Further rate reductions from the European Central Bank would push the euro down further against the dollar.
Third, the moves by the world’s central banks remove event risk from the markets and that has freed traders to exploit the big shortcoming in the measures announced by the recent European summit. The problems in the EuroZone, especially in Italy and Spain, are now, but the help envisioned by the summit largely won’t materialize until plans are announced in December for the European Central Bank to assume the role of a single supervisor—whatever that turns out to mean—for EuroZone banks. That lag gives traders four or five months without significant risk that the European Central Bank and the European rescue funds will intervene on the other side of bearish trades with enough fire power to hurt traders who are betting against the euro, against Italian bonds, and against Spanish bonds.
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