The world’s major central banks acted jointly to provide cheaper dollar liquidity to starved European banks facing a credit crunch as the Eurozone’s sovereign debt crisis threatened to bring financial disaster.
“It is a huge shot in the arm for the badly beaten investor in the midst of a sovereign debt crisis and fears over global growth,” said Joshua Raymond, chief market strategist at City Index.
“This sends a clear and sincere message that the major central banks of the developed world have a strong determination to bring financial markets back from the brink and increase liquidity in the financial system. At a time when European leaders are failing to act, central banks are stepping up to the plate ... giving investors a much needed confidence boost.”
Stocks rose across the board, with miners the standout gainers. The central banks’ action added to upbeat sentiment, with markets already having reversed earlier losses after the surprise move by China.
China’s central bank cut the reserve requirement ratio for its commercial lenders yesterday for the first time in nearly three years to ease credit strains and shore up an economy running at its weakest pace since 2009.
China is the world’s top metals user and the cut is likely to boost demand. Antofagasta and Kazakhmys rose 9.2 and 6.5 per cent respectively. The FTSE mining sector rose 5.8 pe r cent, recovering from an earlier fall, as copper prices surged.
“It is really significant as China is looked to for economic leadership,” said Mike Lenhoff, chief strategist at Brewin Dolphin.
The UK’s FTSE 100 rose 168.42 points, or 3.2 per cent to 5,505.42, the highest close in two weeks, having been as low as 5,274.95. The extension of a rally to four sessions, during which the benchmark rose 7.4 per cent, saw the losses for November cut to just 0.7 per cent.
The heavyweight banking sector was another to gain, reversing losses from earlier in the session. Lloyds and RBS rose 7.1 and 7.5 per cent respectively. Standard & Poor’s downgrade of 15 big banks had sparked worries about higher funding costs.
The energy sector was also higher, with BP up 5 per cent.
Not all strategists were totally positive on the central banks’ action. Some warned that the prospects for company earnings were still weak, and that investors had reasons to be cautious on the equities, given the weak economic backdrop.
“It’s a general push to try to steady markets, both bond markets and equity markets, and calm down some of the more frenetic trading we've seen,” said Julian Chillingworth, fund manager at Rathbone Brothers, which has £15.2 bn under management.
“But I'm very dubious about such moves because often they turn out to be very short-term.”
He said he was forecasting companies’ earnings in 2012 would be flat, and although stocks were cheap, there was still “nervousness about the next year and whether the economy would be sluggish”.
In a sign of improved sentiment, the Euro STOXX 50 volatility index, Europe’s main fear gauge, ended 4.1 lower.