The headlines proclaim the DOW is up 400 points! Yippie, hurrah! But why?
In the middle of the night, the Federal Reserve moved to make it cheaper to swap Euros for dollars, in a coordinated move with Switzerland, Canada, England, the European Central Bank and Japan.
From the Federal Reserve press release:
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system.
This is supposed to stem a global liquidity crunch. In other words, to prop up the Euro's value.
These central banks have agreed to 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. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.
More interesting the Central banks are offering swaps in multi-currency denominations:
As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorized through February 1, 2013.
Some of these have been in place since 2008:
The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points. In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary.
China additionally lowered their bank reserve requirements, from 21.5% to 21%.
China cut the amount of cash that the nation’s banks must set aside as reserves for the first time since 2008.
So why is Wall Street roaring? We don't know. The central banks move does not solve Europe's problems. Just yesterday we see multinational corporations plan for possible end of euro as reported the Financial Times:
International companies are preparing contingency plans for a possible break-up of the eurozone, according to interviews with dozens of multinational executives.
There goes multinationals' currency exchange rate power plays on plant locations:
With countries coming out of the euro, you’ve got massive devaluation that makes imported brands very, very expensive.”
This image, found on business insider (gee, they show something useful, it's usually pretty girls and iPhones), shows the never ending vortex the European sovereign debt crisis has become.
Simon Johnson firmly believes the Euro is D.O.A.
Ultimately, an integrated currency area may remain in Europe, albeit with fewer countries and more fiscal centralization. The Germans will force the weaker countries out of the euro area or, more likely, Germany and some others will leave the euro to form their own currency. The euro zone could be expanded again later, but only after much deeper political, economic and fiscal integration.
Tragedy awaits. European politicians are likely to stall until markets force a chaotic end upon them. Let’s hope they are planning quietly to keep disorder from turning into chaos.
The problems in Europe are still not solved. Some are talking about a fiscal union as saving the day.
Others are mentioning trade imbalances as a significant cause:
What would help the Eurozone most is a MUCH cheaper euro, since the only way out of their fundamental problem (that of Germany running big trade deficits with periphery countries, but no longer wanting to fund the trade deficits that result) is by cheapening the euro greatly, so that Germany runs big trade surpluses with non-Euro countries, and the rest of Europe has more or less balanced trade.
We previously gave additional collections of events which hinted something is a brewing over the Atlantic. This is, in essence, more kicking the can down the road and money printing. In other words, another move for the markets, Wall Street, not main street or even sovereign nations.
Could it be this move is just the start of several? Stay tuned....