U.S. stock markets were up over 3% this afternoon, with European exchanges surging even further, on word that the world’s major central banks are taking concerted steps to support the credit crunch in Europe.
With several of the Euro nations facing a major financial crisis, the US Central Bank, or Federal Reserve, agreed to provide cheaper dollar funding to the European Central Bank. In turn, this allows them to lend to cash-strapped European banks at cheaper rates.
While major markets are capitalizing on the good news of the fresh injection of liquid capital, we can’t be too quick to assume that the fiscal threat has subsided. Although the immediate near-term risk has lifted a bit, it’s important to note that the world is in FAR worse shape than previously assumed. By virtue of the fact that this has become a full-scale worlwide effort is not a small matter. The unfortunate truth is that this will have very little impact on the longer-term difficulties that the Eurpoean nations are having, a situation born of lack of fiscal restraint among the Euro nations. On a brighter note, we saw this action play out in the U.S. in 2008, where we saw a virtual lockdown of liquidity in capital markets and the collapse of Lehman Brothers.
What To Expect
The markets were caught completely off-guard by this morning’s actions. While the actions are supportive, it is very difficult to say for how long, because the world is still very much engaged in a deleveraging process that will, and must, continue. Much of the positive action in today’s market is the direct result of a short-squeeze – essentially investors needing to buy back borrowed shares quickly that they have “shorted” (sold, assuming that prices would fall) in order to avoid losses. It is difficult to know how extensive the short covering will become until the rally subsides.
The bottom line is that although this was certainly positive news for world markets, and the European nations collectively, it remains to be seen what, if any, long-term effect this will have.
Robert C. Henderson is the President of Lansdowne Wealth Management in Mystic, CT. His firm specializes in financial planning and investment management for individuals approaching retirement or already in retirement, with a focus on the particular needs of women that are divorced or widowed. Mr. Henderson can be reached at 860-245-5078 or email@example.com. You can also view his personal finance blog at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.
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