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Central banks to the partial rescue

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by Peter Switzer

Bad European news has sunk this market lately and before that it was Europe’s debt debacle and the US Congress clash along with the S&P downgrade that KO’d investor confidence. Well, overnight in New York the S&P losses from the credit rating kick-in-the-pants were erased!

The one thing bad news needs to soften its impact is good news and we got some of that for Europe with the world’s prominent central banks agreeing to lend European banks US dollars!

And while critics say it’s not a solution to Europe’s debt problem and its reluctance to deal with it in a credible way, it at least shores up the banks’ ability to open their doors and conduct business life as normal. A credit crunch would have been a toxic outcome for Europe and then the world.

Wall Street gains

Timothy Geithner, the US Treasury Secretary, called for the use of ‘overwhelming force’. Well, the world’s central banks working against short-sellers of European bank stocks because they look vulnerable are a pretty solid force.

Some might not agree with me but Wall Street did with the Dow up 186.45 points, or 1.66 per cent, to 11,433.18 while the S&P 500 index was up 20.43 points, or 1.72 per cent, to 1209.11.

Now this doesn’t mean we’re out of the woods and the worst is behind us, but it does mean we’re heading towards the clearing of the trees and if day-by-day good news events can replace bad ones, then the worst might be behind us.

Right now we’re wiping off the overselling which happened when the European outlook was shocking and the USA was thought to be heading to recession.

Now the consensus agrees with what I have been saying — the US should avoid a recession. Clifford Bennett from Empire Economics sees a big bounce in the December quarter but he’s often very optimistic, though he has been right plenty of times.

Data overnight

The market liked the ECB hooking up with major central banks to provide liquidity to European banks — three-month loans, effectively — but we now have to see some other initiatives that will help rebuild confidence.

To the US economy, inflation went from 0.5 per cent in July to 0.4 per cent in August and the State of New York’s reading on manufacturing slipped to -8.82, which was worse than expected. This has now contracted for four months and this is the kind of reading we would hope to see improve over the next two months to confirm our view that the US can avoid a recession.

On the flipside but still negative, the Philadelphia Federal Reserve index of business conditions, which covers the mid-Atlantic region of the US went from -30.7 in August to -17.5 in September. And industrial production rose 0.2 per cent in August. That’s better than a fall.

What’s ahead?

The next big potential news item is the meeting in Poland of European finance ministers along with Timothy Geithner. It’s said he wants the European Financial Stability Facility (EFSF) to do something more substantial to help support the European banking system.

So for now the banking system has been helped, and work is needed on the debt and solvency issue as soon as possible. Let’s hope the news out of Europe overnight sends Wall Street even higher tomorrow morning when the NYSE rings the closing bell.

By the way, the chairman of Morgan Stanley, John Mack is retiring and he will be replaced by the CEO James Gorman. So what? Well, he is an Aussie!

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, September 16, 2011

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