Shares surge on Europe aid plan

An unprecedented move by six of the world's central banks to help the debt-laden nations of Europe triggers a global sharemarket rally, with Australian stocks gaining almost $30 billion in yesterday's trade.

By InvestSMART · 2 Dec 2011

By InvestSMART ·
2 Dec 2011

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AN UNPRECEDENTED move by six of the world's central banks to help the debt-laden nations of Europe has triggered a global sharemarket rally, with Australian stocks gaining almost $30 billion in yesterday's trade.

The rally was sparked by the announcement from the US Federal Reserve that it would expand a program allowing foreign banks to borrow US dollars at a low interest rate.

At the same time, China's central bank moved to relax requirements on cash reserves to encourage new lending.

The US central bank, in a joint statement with the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada and the Swiss National Bank, said the decision to free up capital was aimed at providing much-needed US dollars.

Over the past year it has become increasingly difficult for foreign banks to borrow in US dollars, still the primary currency for global transactions.

''The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,'' read the statement.

World markets reacted swiftly, with stock in Germany jumping almost 5 per cent and the key index of US stocks, the Standard & Poor's 500, climbing more than 4 per cent.

Australian shares joined the global rally, with the S&P/ASX 200 index closing almost 2? per cent higher. Led by BHP Billiton and the big four banks, the key index finished up 108.8 points at 4228.6.

But despite four days of gains on global sharemarkets, concerns about the ability of European leaders to resolve the debt crisis remain.

''The European sovereign debt problem will not be solved only with liquidity,'' said the governor of Japan's central bank, Masaaki Shirakawa.

Olli Rehn, European commissioner for economic and monetary affairs, said negotiations in Europe remained ''critical''.

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Frequently Asked Questions about this Article…

What triggered the recent global sharemarket rally?

The rally was sparked by an unprecedented coordinated move from six central banks, led by the US Federal Reserve expanding a program to let foreign banks borrow US dollars at a low rate, together with China’s central bank relaxing cash reserve requirements to encourage new lending.

How did Australian shares react to the central banks' actions?

Australian stocks joined the global rally, with the S&P/ASX 200 closing almost 2% higher—up 108.8 points to 4228.6—and the market gaining almost $30 billion in one day, led by gains in major miners and the big four banks.

Which central banks took part in the joint announcement about freeing up US dollars?

The joint statement came from the US Federal Reserve together with the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada and the Swiss National Bank.

Why did central banks decide to free up US dollar liquidity for foreign banks?

According to the joint statement, the move aimed to ease strains in financial markets and mitigate effects on the supply of credit to households and businesses, after it had become increasingly difficult over the past year for foreign banks to borrow US dollars.

How did other world markets respond to the central banks' measures?

World markets reacted strongly: German stocks jumped almost 5%, and the US benchmark index, the S&P 500, climbed more than 4% following the announcements.

What role did BHP Billiton and the big four banks play in the market rally?

BHP Billiton and the big four Australian banks led gains on the ASX 200, helping drive the index’s almost 2% rise on the day covered by the article.

Does this coordinated liquidity action solve the European sovereign debt crisis?

No. While the measures eased market strains and sparked rallies, concerns remain about Europe’s debt problems—Japan’s central bank governor warned liquidity alone won’t solve sovereign debt issues, and European officials said negotiations remain 'critical.'

What should investors understand about the central banks' coordinated move and market impact?

The article highlights that central banks moved to provide dollar liquidity and encourage lending to support credit and economic activity, which lifted global markets and Australian stocks—however, it also cautions that underlying European debt issues still need political and policy solutions.