Stock futures soar after central banks act globally

(Reuters) - Stocks rose 3 percent on Wednesday as major central banks jointly added liquidity to the world's financial system, easing worries about a global downturn.
The U.S. Federal Reserve and the European Central Bank as well as the central banks of Canada, Britain, Japan and Switzerland agreed to lower the cost of existing dollar swap lines -- reducing the cost of temporary dollar loans to banks -- by half a percentage point.
Financial, energy, materials and industrial stocks, among those seen most economically sensitive, led gains, though all S&P 500 sectors rose. Bank of America Corp (NYSE:BAC) rose 3 percent to $5.22 after hitting a near 3-year low, while JPMorgan Chase & Co (NYSE:JPM) added 6.3 percent to $30.36.
"I don't see the global economy going into recession. In fact, today's movement by the central banks to inject massive liquidity I think cushions the global economy," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.
The Dow Jones industrial average (DJI:^DJI) was up 393.14 points, or 3.40 percent, at 11,948.77. The Standard & Poor's 500 Index (SNP:^GSPC) was up 38.68 points, or 3.24 percent, at 1,233.87. The Nasdaq Composite Index (Nasdaq:^IXIC) was up 78.57 points, or 3.12 percent, at 2,594.08.
Copper and oil futures also rose sharply.
The S&P materials sector index (.GSPM) gained 4.5 percent.
The central banks' actions were intended to ensure that European banks, facing a credit crunch, have enough funding amid the euro zone's worsening sovereign debt crisis.
The moves followed an unexpected cut in bank reserve requirements in China, intended to boost an economy running at its weakest pace since 2009.
Further encouraging investors, the latest U.S. data suggested the U.S. economy was moving more solidly toward recovery. The U.S. private sector added the most jobs in nearly a year in November, while business activity in the U.S. Midwest grew faster than expected in November.


It’s supportive but not necessarily a game changer,” said Michelle Girard, senior U.S. economist at RBS Securities Inc. in Stamford, Connecticut. “The impact is more psychological than anything else” as investors take heart from policy makers’ coordination, Girard said.
The premium banks pay to borrow dollars overnight from central banks will fall by half a percentage point to 50 basis points, the Fed said today in a statement in Washington. The so- called dollar swap lines will be extended by six months to Feb. 1, 2013. The Fed coordinated the move with the European Central Bank and the central banks of Canada, Switzerland, Japan and the U.K.
The six central banks also agreed to create temporary bilateral swap programs so funding can be provided in any of the currencies “should market conditions so warrant.” Those swap lines were also authorized through Feb. 1, 2013.

Starting December

The swap lines were previously set to expire Aug. 1, 2012. The new pricing will be applied to operations starting on Dec. 5. Seven-day loans would carry an interest rate of about 0.58 percent, down from 1.08 percent, based on the current one-week overnight index swap rate of 0.08 percent. OIS is a measure of expectations for the benchmark federal funds rate.
“This was in response to increased tension in global financial markets,” Bank of Japan Governor Masaaki Shirakawa said at a press conference in Tokyo today. “Coordinated action will give markets a sense of security.”
The action wasn’t aimed at supporting any specific financial institution, Canadian Finance Minister Jim Flaherty said in a Bloomberg Television interview in New York.


Fed policy makers voted 9-1 for the swap action in a Nov. 28 videoconference, with Richmond Fed President Jeffrey Lacker dissenting, Michelle Smith, a Fed spokeswoman, said in an e- mail. Lacker voted in place of Philadelphia Fed President Charles Plosser, who was unavailable for the meeting, Smith said. Laura Fortunato, a spokeswoman for Lacker at the Richmond Fed, didn’t immediately respond to a request for comment.


Two hours before the Fed announcement, China cut the amount of cash that the nation’s banks must set aside as reserves for the first time since 2008. The level for the biggest lenders falls to 21 percent from a record 21.5 percent, based on past statements


Seven-Day Refinancing

Yesterday, the ECB allotted the most to banks in its regular seven-day refinancing operation in more than two years, lending 265.5 billion euros ($357.5 billion). The ECB offers unlimited funding to euro-area banks against eligible collateral.
“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 Fed statement said.
Under the dollar liquidity-swap program, the Fed lends dollars to the ECB and other central banks in exchange for currencies including euros. The central banks lend dollars to commercial banks in their jurisdictions through an auction process.
The swap arrangements were revived in May 2010 when the debt crisis in Europe worsened. The Fed three months earlier had closed all swap lines opened during the financial crisis triggered by the subprime-mortgage meltdown in 2007.

Dollar Tender

European lenders asked for a total of $395 million in the ECB’s 84-day dollar tender conducted in coordination with the Fed on Nov. 9. In the first offering on Oct. 12, the ECB lent six banks $1.35 billion for three months. The next three-month loan will be offered on Dec. 7.
The coordinated action “lowers the cost of emergency funding and increases the scope,” Mohamed El-Erian, chief executive officer, of Pacific Investment Management Co. said in a radio interview today on “Bloomberg Surveillance” with Ken Prewitt and Tom Keene.
Central banks “are seeing something in the functioning of the banking system that worries them,” El-Erian said.


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