The world's central banks took centre stage this afternoon, pushing stock markets higher on news that policymakers were acting in concert to help shore up the European banking system.
In the real economy however, the situation remains no better, as yet more disappointing US economic data has reminded us.
By 3.45pm (London time), the Dow Jones was 0.7% higher at 11324.55, and the S&P 500 had added 0.6%, reaching 1195.70. The central bank action had a more marked effect in London, with the FTSE 100 surging 2.2% to 5344.64.
Central banks to the rescue
This morning's big story that of the ‘rogue trader’ at UBS, has been knocked into a cocked hat by the co-ordinated intervention of the world’s major central banks.
The ECB announced that, in conjunction with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank, it would carry out three US Dollar liquidity operations with a maturity of around three months.
Effectively, this means the central banks have agreed to lend Dollars in order to shore up the global banking system.
The commitment of the world’s central bankers to active intervention has provided the necessary tonic this afternoon.
Stock market indices, which were already pushing higher, have raced ahead. However, there is a sense of unease about all of this.
It is a tacit acknowledgement that there are indeed major problems in the global economy, which central banks are now actively trying to pre-empt.
Greece remains in the same position today as it was 24 hours ago, i.e. very close to the brink of default. However, it seems to be almost a certainty now that Athens will receive its next tranche of bailout funds that will allow it to survive beyond October.
There is still no solution to the Eurozone crisis, and platitudes from European leaders have proven to be only short-term fixes.
US data no better
Meanwhile, the US economy continues to struggle. Jobless claims rose yet again, with first-time claims hitting 428,000 last week, the highest level since June, having been forecast to drop to 411,000.
Continuing claims were also up, to 3.726 million, so there is little good news to take away from this data.
An index of manufacturing in New York state, the Empire index, continued to decline, falling to -8.82 in September from -7.72 a month earlier, instead of improving.
Finally, the Philadelphia Fed, the index that provided such a major shock last month, managed to post some improvement, but remained firmly in negative territory.
A better figure than last month’s was hardly surprising, but forecasts of a rise to -15 were too optimistic with the index clawing its way upward to -17.5.
Still, we seem to be back to the old ‘bad news is good news’ theme, as markets await the Fed meeting next week.
If the data remains firmly on the negative side, then, so the theory goes, the Fed is more likely to begin QE3.
Whether this is true or not remains to be seen, but there has been no shortage of Fed officials willing to say that more easing is possible, and perhaps even necessary.
Gold retreats
Gold futures have continued to slip, giving up the $1800 per ounce level as risk appetite surges afresh.
The declaration of intent to keep Greece in Europe, and the co-ordinated central bank move has meant that safe-haven demand has lessened as people become more optimistic about the immediate future.
Nonetheless, the yellow metal should not be written off yet; while some recent entrants to the market may have suffered losses, long-term holders of gold are still sitting pretty.
It suffered some sharp falls last month, but then powered back once again as QE3 talk dominated markets. If the Fed does go for more direct intervention, or if, perhaps when, Europe explodes into crisis once more, prices could surge yet again.
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'Gold Spreads Tumble on Declaration of Intent to Keep Greece in EU', Article by IG Index, last update: 15-Sep-11
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