Pre-Market Brief:
Market tone: Stocks called higher following China’s rate cut, which boosts the euro against the dollar; Treasurys higher; Nymex crude up at $100.09; gold up 0.6% at $1,705.37.
Overnight action: China cuts banks’ reserve requirement; Goldman focuses on funding others; Euro-zone jobless hits high.
Watch for: ADP report and Chicago PMI data.
European stocks rose, reversing earlier declines, after China said it will cut the amount of cash that banks must set aside as capital for the first time since 2008. U.S. index futures rallied, while Asian shares fell.
China cutting its bank reserve ratios for the first time since 2008 to spur more lending is goosing stocks in Europe and stock futures in the US, but is it really such good news?
Consider what a dramatic turnaround this represents. China for several months was busily trying to tamp down on liquidity to keep inflation in check. Now it has reversed course entirely as growth and inflation have slowed.
Easing credit again is a sign policy makers in Beijing see things getting worse, as one of China’s biggest export customers, the euro zone, withers.
On the brighter side, though — and this is clearly what the market has in mind this morning — this is likely to be the first step in a new flood of cash coming from central banks around the world. First Beijing, soon Brussels and the Fed.
The euro gained versus the dollar and the yen after the Federal Reserve and five other central banks agreed to lower interest rates on dollar liquidity swap lines.
“It caught the market by surprise,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank. “It is a further measure being taken to help the liquidity problem that is due to continued crisis in Europe.”
The euro climbed 1 percent to $1.3445 at 8:10 a.m. in New York after earlier rising as much as 0.4 percent. The yen dropped 0.5 percent to 104.25 per euro and rose 0.6 percent to 77.45 per dollar.
The new interest rate has been reduced to the dollar overnight index swap rate plus 50 basis points, or half a percentage point, from 100 basis points, the Fed said in a statement in Washington. The Bank of Canada, Bank of England, Bank of Japan, European Central Bank and Swiss National Bank are involved in the coordinated action, the Fed said.
“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,” the statement said.
Euro-area finance ministers said they would seek a greater role for the International Monetary Fund and the European Central Bank in fighting the sovereign debt crisis after conceding the effort to expand their bailout fund missed its target.
The finance chiefs of the 17 nations using the euro agreed to work on boosting the resources of the IMF so it can “cooperate more closely” with the European Financial Stability Facility, Luxembourg’s Jean-Claude Juncker told reporters late yesterday in Brussels after leading the meeting.
“It’s clear that we can go further through the IMF and probably action by the European Central Bank,” Belgian Finance Minister Didier Reynders said today as ministers gathered for a second day of talks. “For the IMF, we are working to see how to reinforce its action and possibly contribute to a boost in its resources. As for the central bank, it’s for the central bank to make its decisions.”
After a series of stop-gap accords failed to protect Italy and Spain from surging bond yields, Europe is under growing pressure from U.S. leaders and international financial markets to find ways to boost the EFSF’s effectiveness. The finance chiefs agreed on a plan yesterday to guarantee up to 30 percent of bond issues from troubled governments and to develop investment vehicles that would boost the facility’s ability to intervene in primary and secondary bond markets.
European heads of government meet on Dec. 9 in Brussels, with Germany pushing for governance changes that would tighten enforcement of budget rules. The move might make it easier for the ECB to play a bigger part in supporting euro-area nations, possibly channeling loans through the IMF, two officials familiar with the matter said yesterday.
Wednesday’s economic calendar:
7:00 MBA Mortgage Applications
7:30 Challenger Job-Cut Report
8:15 ADP Jobs Report
8:30 ISM New York Business Index
8:30 Productivity and Costs
9:45 Chicago PMI
10:00 Pending Home Sales
10:30 EIA Petroleum Inventories
2:00 PM Fed’s Beige Book
3:00 PM USDA Ag. Prices