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While you were sleeping: Bankers helping bankers

Friday 16th September 2011

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A group of global central banks is doing what European policy makers have yet to do, take concerted action to offer fresh financing options to dollar-strapped banks in the euro zone.

The new effort, at the behest of the European Central Bank, did exactly what it was supposed to do. The euro has surged, up as much as 1.3%, and equities in both Europe and Wall Street have extended their gains, paced by financials.

In late trading in New York, the Dow Jones Industrial Average rose 1.45%, the Standard & Poor's 500 Index advanced 1.49% and the Nasdaq Composite Index gained 1.23%.

In Europe, the benchmark Stoxx 600 Index closed with a 2% gain, extending its three-day advance to 4.5%. Not even a US$2 billion loss by a trader at UBS in London could derail the positive mood.

“There are a lot of challenges out there and the market is having a tough time, so we are seeing a little bit of a relief rally,” Bill Dinning, head of strategy at Kames Capital Plc in Edinburgh, told Bloomberg.

Among the good news today was the mix of U.S. data. While new claims for jobless benefits rose and factory output contracted along the Eastern U.S., industrial output increased as did consumer prices.

The latest data bolsters the case for the Fed to take action as early as next week though it tempers the need for the Fed to do much.

In other market activity, oil advanced for a second day, taking its cue from the hope that policy makers are getting serious about stemming the crisis to avoid derailing the global economic recovery.

“Oil is supported, like the equity markets, by everybody’s hope that the crisis could ease,” Gerrit Zambo, trader at Bayerische Landesbank in Munich, told Bloomberg.

“If you look at the big picture of macroeconomic data, there can only be one direction for oil in the medium term, and that’s to the downside,” he said.

Zambo predicts Brent will drop toward US$100 a barrel. Brent oil for November settlement was up US$1.97 at US$111.62.

Both U.S. Treasuries and gold slumped, though, as the optimism reduced their safe-haven appeal.

Yields on 10-year notes jumped 9 basis points 2.07% at 2.26pm in New York, according to Bloomberg Bond Trader prices.

Gold futures for December delivery dropped 2.5% to US$1,781.40 an ounce.

The central bank action comes a day before a gathering of top European financial ministers and central bankers in Poland.

Also attending tomorrow’s meeting, a first, is U.S. Treasury Secretary Timothy Geithner. Geithner has been pressing his European counterparts to be more aggressive, and according to Reuters, he will press his idea of a wider financing facility.

In 2008, the U.S. Federal Reserve and Treasury created the Term Asset-Backed Securities Loan Facility. Under TALF, the New York Fed would lend out up to US$200 billion to renew the asset-backed securities market.

"The bottom line is the EU and the IMF and the industrialised nations are trying to convince the market that the euro is here to stay, euro land is not going to disintegrate and Greece is probably going to avoid a default," Peter Cardillo, chief market economist at Rockwell Global Capital in New York, told Reuters.


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