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 has triggered 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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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…

Why did global shares surge and trigger a sharemarket rally?

Shares surged after six major central banks announced coordinated actions to free up US dollars and ease market strains. The US Federal Reserve expanded a program letting foreign banks borrow dollars at low rates, while other central banks moved to provide liquidity, sparking a broad market rally.

What specific central-bank actions were taken to support markets?

The US Fed expanded a dollar-lending program for foreign banks, and five other central banks joined a joint statement committing to free up capital. At the same time, China’s central bank relaxed cash-reserve requirements to encourage new lending.

How did Australian shares react to the central-bank measures?

Australian stocks jumped, with the market gaining almost $30 billion in one day. The S&P/ASX 200 closed nearly 2% higher, up 108.8 points at 4228.6, as local investors rallied alongside global markets.

Which companies or sectors led the ASX rally?

The rally in Australia was led by resources giant BHP Billiton and the big four banks, which drove much of the S&P/ASX 200’s gains on the day.

What were the immediate global market moves after the announcement?

World markets reacted strongly: German stocks jumped almost 5% and the US S&P 500 climbed more than 4%, reflecting a swift, widespread risk-on response to the coordinated central-bank measures.

Will the central-bank liquidity measures solve the European sovereign debt crisis?

No — the measures are intended to ease financial strains and support credit supply, but they don’t by themselves resolve the underlying European sovereign debt problems. Policymakers and negotiations in Europe remain critical to finding a lasting solution.

Why does freeing up US dollars matter for global banks and investors?

US dollars remain the primary currency for global transactions, and it had become harder for foreign banks to borrow dollars. Expanding dollar lending eases funding stress, helps maintain credit flow to households and businesses, and reduces short-term market strain.

What should everyday investors watch for following this market rally?

Investors should watch ongoing European negotiations over sovereign debt, any follow-up central-bank actions, and signs that liquidity measures translate into sustained credit to households and businesses. Continued market volatility is possible if political solutions in Europe don’t progress.