Europe really needed some help and it got it with six central banks — the European Central Bank (ECB), the US Federal Reserve and counterparts from Japan, Canada, Switzerland and the UK — turning on the liquidity tap overnight to help arrest the looming European recession and potential blockages in the banking system.
This, and a solid run of good US economic data, explains why the Dow nearly topped 500 points overnight, but the question remains: can we really see a Santa Claus rally?
Let’s have a look at the run of positive data that is getting me a little excited:
- The Beige Book, which looks at regions and sectors around the US economy, came in more bullish than expected.
- The US ADP private sector jobs report came in at 206,000, which KO’d the forecast of 130,000 in November.
- Black Friday retail sales rang up a very positive outlook of the upcoming holiday shopping season in the States.
- These results follow very bright durable goods figures, solid ISM manufacturing data as well as ISM services data and a massive rebound in consumer confidence.
The simple summary is that the US is recovering and only a disaster in Europe could derail it and so the good sense of the central banks’ ‘shock and awe’ play was timed to perfection.
This action has increased speculation that the next step could be the ECB lending money to the International Monetary Fund (IMF), which in turn will help out the likes of Italy and Spain. An action like this will get around the ECB’s rule that stops it providing assistance to sovereign countries, although it can help banks, which was what today’s play was all about.
Come Friday, Germany’s Chancellor will outline her plan for tighter fiscal discipline for European Union (EU) members and I reckon the run of news – if it can remain positive and indicate that Europe is heading in the right direction, step by step – then we could see a melt up of stocks.
Of course, if recent history prevails, then a meltdown is always a possibility, but I have to say I’m getting the feeling that the pendulum of news and economic data is swinging to the positive, meaning this rally could have real legs.
Another shock and awe play that could be in the wings would be the likes of China stepping in to support the IMF as well based on the fact that it is now seeing the other countries of the world riding to the rescue of Europe.
What we have now is a window, which has been opened up by this central bank play, but now the Europeans have to start pushing their slack and procrastinating politicians and key regulatory bodies through this opening to build on the shot of confidence this co-ordinated central bank action has given Europe, the stock market and ultimately the global economy.
We are not out of the bears’ woods just yet, but we could be close to the edge where the paddocks of resting bulls are grazing, waiting to charge.
As the old movie line nearly went: “One false move and the fat PIIGS cop it!” *
* PIIGS is the acronym for the EU’s debt ridden countries of Portugal, Italy, Ireland, Greece and Spain.
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