Central Banks to the Rescue

World central banks have come to the rescue yesterday with an announcement of  “coordinated action” to help the economy.  The U.S. Federal Reserve announced:

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. 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.

This news triggered a huge stock market rally on Wednesday: Asian markets had already closed for the day when the news broke.  However, Asian stocks have opened strongly on Thursday.  Japan’s Nikkei is up over 2 percent, the Hang Seng is nearly 6 percent higher and India’s Sensex is 3 percent higher. Whilst it’s nice to see some green on the board after a couple of weeks of falling stock prices we shouldn’t get too carried away with this news.  The coordinated intervention is aimed at helping credit markets which have frozen up over the past few weeks in response to the worsening Eurozone crisis (credit crisis 2.0).  The intervention is aimed at flooding the market with liquidity (probably because a Eurozone bank was on the verge of collapse).  That’s good news in the short-term but it doesn’t solve the underlying problem which is one of solvency, not liquidity. The coordinated central bank action is akin to medics resuscitating a person who’s had a heart attack.  The action will keep the patient alive but their longer-term survival can only be achieved through diet, exercise and drugs.  For Europe and the rest of the world that means dealing with insolvent sovereigns and their banking systems.  The action announced yesterday doesn’t address this. Tellingly, the bond markets were less enamoured with the news than stock markets.  Yields on Eurozone debt did fall yesterday but those falls were much more muted than the dramatic rises seen in global equity prices.

Ready to chat with
a specialist?

Get started

You may also be interested in

Behavioural finance

Behavioural finance: the psychology of investing

Behavioural finance theory suggests we make decisions based on emotions rather than logic. Understanding it could help you make better investment decisions

Read more
The benefits of a financial second opinion

5 benefits of a financial second opinion

In this article, we explore the five key benefits of a financial second opinion and why a fresh perspective could be just what you need.

Read more
questions to ask a financial adviser

7 Questions to ask a financial adviser

We look at the key questions you should ask a financial adviser before hiring them and one important question you need to ask yourself.

Read more
Time is running out to top up your UK State Pension

Time is running out to top up your State Pension

Time is running out to top up your State Pension. Here is everything you need to now about State Pension top-ups.

Read more