httpvh://www.youtube.com/watch?v=9DYowrr78lM

Yesterday was meant to be the quietest day of the week and
turned into one that many people in the market will not forget. Rumours had
been in the market for a couple of weeks that a coordinated response from
central banks to unjam funding markets was possible and it came through
yesterday. The Federal Reserve alongside 5 other central banks (Bank of
England, ECB, Bank of Japan, Bank of Canada and Swiss National Bank) all
announced a plan to allow banks to borrow dollars at lower rates than
previously. Cutting these swap costs are equivalent to interest rate cuts and
the fact that these central banks are now basically providing unlimited US
dollars to banks with which to fund themselves, the central banks will be
hoping this is a turning point in the crisis.

We do not know what caused this move, we may never know, but the
smart money is on the fact that yields on 1 yr German debt went negative
yesterday morning (i.e. paying Germany to lend it money). This may have been a
signal that the money markets were a short shove away from complete collapse.
It also signals that the world’s central bankers have had enough of the
political mud-slinging intransigence that has been the typical response to the
world’s problems. This isn’t a new plan of course and we have seen cuts to
these swap rates in the past and they have not worked. Maybe this buys a Europe
a little time because it certainly doesn’t fix the long-term structural issues
in the Eurozone.

In currency land we saw huge moves away from the US dollar with
GBP and EUR gaining about a per cent against the greenback and GBPEUR slipping
back into the 1.16s. It seems that these pressures are already dissipating
however, with Italian, French and other European debt yields rising already
this morning following falls yesterday.

This does however seem like the beginning of another round of
monetary policy easing from the world’s central banks and other moves into the
markets. The obvious second task for the ECB is to bring bond yields lower and
news reports yesterday suggested that the ECB is considering a big increase in
its Securities Markets Program including targeting explicit government bond
yields. The hope is that by setting a credible target in conjunction with a
long-term bank liquidity facility, it can ensure governments retain access to
bond markets; banks will borrow to buy bonds at attractive yields knowing any
losses are capped. We expect that something of this ilk may be announced at the
ECB’s next meeting on Dec 8^th, alongside a cut in interest rates.

Away from the bank intervention there was not much to really
speak of yesterday although China did cut its “reserve requirement ratio” which
is a portion of cash that banks must set aside and not lend to businesses or
consumers. A cut of that allows these banks to lend more and give a boost to
productivity. Chinese economic indicators have been slipping and last night’s
PMI from the manufacturing sector showed that China’s manufacturing activity
slipped for the first time since February 2009.

Those same PMIs from other nations will be the main focus of the
markets today as, although this liquidity plan may help banks in the short
term, it does not solve any underlying growth issues. Manufacturing is expected
to fall in the UK, Italy and Spain whilst remaining weak in Germany and France.
Poor figures could eliminate yesterday’s good will instantaneously.

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