New stimulus moves fail to excite markets

Announcements in Europe and China get a ho-hum response, partly because the news was widely anticipated.

By Jim J. Jubak Jul 5, 2012 3:14PM
Three of the world's big central banks took action Thursday to add stimulus to local economies -- and global stock markets at best yawned.

First out of the chute, the Bank of England announced that it would restart its program of buying bonds two months after the central bank stopped its purchases. The Bank of England's program of quantitative easing will buy 50 billion pounds ($78 billion) in bonds.

Post continues below.
Next up, the People's Bank of China announced a cut to its key benchmark interest rate. The cut, the central bank's second rate reduction in a month, will lower the one-year lending rate that banks can charge to 6%, a drop of 0.31 percentage points. The one-year deposit rate will fall to 3%. Banks can offer loans at as much as 30% less than the benchmark rate.

And finally, rounding out Thursday's action, the European Central Bank cut its benchmark interest rate to 0.75%, a 0.25 percentage point reduction. The central bank also cut the rate that it pays banks on overnight deposits to 0% from 0.25%. The theory there is that because banks no longer earn a return to simply keep money on deposit at the central bank, they'll be more likely to lend to customers seeking financing.

And the reaction in the financial markets?

The Standard & Poor's 500 Index ($INX) was down 0.2% Thursday afternoon. The German DAX index closed down 0.45%. The euro is down to $1.2388 against the U.S. dollar, a decline of 1.12%. The yield on Italian 10-year government bonds has climbed back above 6% and the yield on the Spanish 10-year has climbed to 6.8%.

Three reasons for the tepid -- or worse -- reaction.

First, the moves by both the Bank of England and the European Central Bank were widely anticipated and priced into the financial markets. The move by the People's Bank was indeed a surprise, but it came with Asian markets already closed. It will be interesting to see if the reaction out of Hong Kong and Shanghai is more positive in Thursday night's trading.

Second, traders are seizing on the negatives in the economic assessment by central bankers, especially those by the European Central Bank's Mario Draghi, to conclude that growth is slipping more than expected, that Thursday’s measures aren't likely to be enough to turn the situation around, and that more interest rate cuts are in the cards -- and soon. Further rate reductions from the European Central Bank would push the euro down further against the dollar.

Third, the moves by the world's central banks remove event risk from the markets, and that has freed traders to exploit the big shortcoming in the measures announced by the recent European summit. 

The problems in the eurozone, especially in Italy and Spain, are current, but the help envisioned by the summit largely won't materialize until plans are announced in December for the European Central Bank to assume the role of a single supervisor -- whatever that turns out to mean -- for eurozone banks. That lag gives traders four or five months without significant risk that the European Central Bank and the European rescue funds will intervene on the other side of bearish trades with enough fire power to hurt traders who are betting against the euro, against Italian bonds, and against Spanish bonds.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 
Tags: chinaeuropefinancial servicesJim Jubak
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20Comments
DieHardCentrist
Jul 5, 2012 4:22PM
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What a surprise!  Efforts to stimulate the world's various economies that did not work in the past and will probably not work in the near future are of no interest to the markets?  Doing the same thing and expecting different results = insanity.  On the other hand what else can they do?
Drwinstonoboogie
Jul 5, 2012 4:40PM
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These stimulus moves are wiping out your social security.
Someone
Jul 5, 2012 4:45PM
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No news here!!  What a great idea, let's do some more of what already didn't work!! 
Active RIA
Jul 5, 2012 5:40PM
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"On the other hand what else can they do?"

 

ummm, let the free market system take over for the most part, which will punish the bad actors, punish those who did not save, punish those in too much debt, punish those who loaned money to those in too much debt, collapse the weak and leave the strong standing, and get started on healing the economy instead of propping it up with ineffective artificial crutches and hopium.

 

it would be painful - but the longest journey begins with a single step and we are still standing on square one.

Reteplabel
Jul 5, 2012 5:59PM
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The $ amounts they are talking about are trivial compared to what our own "Great Socialist Leader" wasted on trying to stimulate an economy. They are just throwing away money and increasing their debt. No wonder the markets were not impressed.

The only reason that stocks are where they are right now is that people have been forced to put their money there because of what in reality is ZERO returns in the bond markets. By not letting the markets determine what interest rates should be and what money is worth the FED and ECB are just setting everyone up for another great fall.

this one may be the biggest of em all.

Let the market decide things not the government. If we had done this from the start we would be well on the road to recovery by now.

psychedout
Jul 5, 2012 6:22PM
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Active RIA; "ummm, let the free market system take over for the most part, which will punish the bad actors, punish those who did not save, punish those in too much debt, punish those who loaned money to those in too much debt, collapse the weak and leave the strong standing, and get started on healing the economy instead of propping it up with ineffective artificial crutches and hopium.

it would be painful - but the longest journey begins with a single step and we are still standing on square one."


That happened before during the great depression. Currency expansion is being used to prevent it's reoccurrence. Whether or not it will work as it was intended, is to be played out. Since some have said that WW2 was what brought the country out of it's funk, we are in new territory.

IDK and ME
Jul 5, 2012 5:34PM
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Stimulus increases inflation and reduces consumer buying power. Reduced buying power reduces demand in increases unemployment.
SRTdriver
Jul 5, 2012 7:25PM
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oh this is way toooo much to accept, the stimulus was working sooooooooooooooo well here, all 2 of em, or is it 3 now??? hmmmm, I mean obama is such a genius, and so cool with that crease in his pants that makes him sooo cool and smart according to the new york communist slimes, so europe's stimuli isn't working?? failes to excite??? ho hum response? well I know what we need ladies and gentlemen, more and more spending like insane looney toones lefist stalinist pigs here in the states, that'll fix everything, everywhere!! on every continent!!! yea!!right!! oh wait, we are spending like insane looney toones with this insane obama regime 17% unemployment, leave it to the obama regime zombies to think we're doing good here!!
fastfrog
Jul 5, 2012 8:00PM
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What the Federal Reserve and other countriies central banks haven't factored in is that for every action, there is an equal but opposite reaction. Lower rates to encourage borrowing, refinancing, stimulates somewhat; however, lower rates take interest income out of the hands of savers and retirees. Net result is 0. Just as the old law of physics stated.
NoGubmentMotorsCarForMe
Jul 5, 2012 11:32PM
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It seems Europe can find almost unlimited ways to keep rearranging the deck chairs on the Titanic.
Countingsheep1
Jul 5, 2012 5:53PM
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Stimulus moves won't stimulate until there's the right balance between supply and demand to prompt businesses to actually invest.

 

As long as demand is low, all these stimulus packages will do absolutely zilch beyond a sort of psychological placedo effect.  

 

However, give it a few years, once the growth in demand catches up to the current procuction capacity, we'll have a QE-induced manufacturing bubble that will make the housing bubble look like a pinball.

 

There will be a strong recovery in a few years, followed by a much, much worse recession afterwards.

Someone (SirTim)
Jul 5, 2012 10:39PM
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National Debt Forgiveness ACT!!!!
Floating
Jul 6, 2012 10:14AM
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Without job recovery, lowering borrowing interest rates won't have much positive effect, except for those who can afford it in the first place

......in the US, how about lowering tax rates for SMALL businesses and offer a hiring incentive?



Someone (SirTim)
Jul 5, 2012 6:20PM
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National Debt Forgiveness ACT. Every Legal US citizen will be given $10,000 debt forgiven. Those with no debt will receive a tax credit. Not only will this infuse trillions of debt relief into the economy it will also stimulate buying again thus boosting the economy. Banks got a stimulus for screwing up so let the power of the masses fix the economy with the Nationa Debt Forgiveness ACT! Pass it on 
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