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Wall Street enjoyed a big jump Wednesday morning, after a coordinated action by central banks around the world to provide more liquidity to the global financial system.
The U.S. Federal Reserve, after a similar effort in September, will “lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points.”
Wednesday's move from the Fed was matched by corresponding actions from the Bank of Canada, Bank of England, Bank of Japan, European Central Bank and Swiss National Bank. The new pricing applies to operations conducted as of Dec. 5, and the authorization of the swap arrangements has been extended to Feb. 13. (Read the FOMC press release here.)
While the effort to provide more liquidity may temporarily soothe the symptoms of Europe’s debt crisis and allow financial institutions easier access to funding, it does little to address the underlying roots of overburdened governments that need to be propped up while they drastically cut spending.
Efforts to tackle the crucial issues at the heart of the crisis continue to move in fits and starts. The European Financial Stability Fund (EFSF) announced new leverage tools geared at increasing its lending capacity on Wednesday, but it still remains to be seen where the additional financing will come from for the public-private special purpose vehicles the EFSF intends to use to provide funding to sovereign governments through primary and secondary bond market purchases. That funding could in turn be used to recapitalize European banks that are at risk of crumbling due to their exposure to the region's shaky credits.
Those concerns took a backseat Wednesday morning though, as equities rallied and bond yields in at-risk countries like Italy and Spain held fairly steady.
China also gave the market a helping hand Wednesday, cutting the reserve requirement ratio for its banks in a bid to jumpstart an economy that has slowed from its torrid pace and fueled concerns about a hard landing that could threaten precarious global growth. (See "China's Slowing Growth Could Be The Market's Next Crisis.")
The Dow Jones industrial average leaped 410 points to 11,965 in the first two hours of trading, while the S&P 500 added 41 points to 1,237 and the Nasdaq gained 89 points to 2,2604. The victim of the surge was the dollar, which stumbled on the central banks' latest move to flood the market with more greenbacks. The euro climbed to $1.3457, from $1.3315 Tuesday.
Bank of America shares will be in focus, after the second-largest U.S. bank by assets flirted with the $5 threshold Tuesday. A downgrade from S&P of the bank’s debt and that of virtually all its rivals – including Morgan Stanley, Goldman Sachs Group and Citigroup – seemed to put the bank at risk of another rocky session Wednesday, but the macro news buoyed most stocks and BofA was up 4.5%.
In its statement Wednesday, the Federal Reserve attempted to make clear that the coordinated central bank effort was not made because of any concerns about short-term liquidity for U.S. banks:
U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.
If that is the case, it bears wondering just how bad conditions are in European banks that another bilateral effort to provide dollars was necessary to give Euro zone leaders a longer runway to figure out a solution the market will support.