By Maximilian Clarke
A landmark agreement announced on Wednesday by some of the world’s leading central banks to boost liquidity and bring about a more stable world economy immediately restored confidence in the world’s markets.
The positive effects, however, are unlikely to be long lasting and amount to little more than printing money, says Steen Jakobsen, Chief Economist as Saxo Bank.
The concerted central bank action has effectively resulted in the US printing money for Europe seeing as the European Central Bank will not, says Steen.
The surprising joint intervention by the world’s largest central banks to make it cheaper for financial institutions outside America to borrow dollars has had a positive effect on risk sentiment, but is not expected to last long.
For an extended rally or to just sustain gains something more needs to be put on the table, like better fundamentals, plus structural changes and real commitments to toing the line in Eurozone nations, says Steen. The reason being that the severe solvency issues in Europe and deep rooted growth problems are still very much plaguing outlooks.
One could argue that with the central banks having joined forces the pressure is now more so on European politicians to implement lasting austerity and commit to cleaning up their backyards and follow standard rules. The question is whether next week if EU leaders will be able to set things straight once and for all when they meet for the seventeenth time to solve the issues. Steen remains doubtful.
In the meantime, the central bank action has resulted in the cost of emergency dollar funding being cheaper for European banks than US banks. Therefore there is increased expectation now that the Federal Reserve will lower its discount rate by at least 25 basis points before the new dollar swap rate kicks in on December 5. A deeper cut is also possible, he says but that would mean the Federal Reserve is virtually letting go and committing to printing money forever!
Steen also comments on the global macro situation, in particular China, following the Reserve Requirement Ratio cut amid a slowing growth scenario and in terms of timing in a global context. Meanwhile US data continues to please for now at least but he warns that the better numbers may be petering out.
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