Stocks rebound as markets focus on talk of US stimulus measures

MARKET WRAP:US AND European stocks staged a solid rebound as the markets largely shrugged off continued tensions in the euro zone and opted instead to focus on the possibility of fresh stimulus measures from the US Federal Reserve.

“Despite the euro-area travails, the federal open market committee decision is likely to be the market focus for the next couple of days,” said Piero Ghezzi at Barclays Capital.

The US central bank will conclude a two-day policy meeting today and is expected to unveil measures to extend the duration of its balance sheet – through what has been dubbed “Operation Twist” – rather than announce more quantitative easing (QE3).

“Even in the absence of QE3, the ‘measured response’ of an Operation Twist should still have important signalling effects to the markets,” said Michael Hanson, economist at BoA-Merrill Lynch.

“It can bolster confidence and prevent self-reinforcing negative sentiment from taking hold. It also can signal that the Fed is not out of bullets but continues to innovate.”

Others, however, argued that if the Fed simply opted for a “twist operation” – selling shorter dated assets to buy longer dated ones – and gave no strong verbal steer towards quantitative easing, then the markets would probably be disappointed.

Italy’s downgrade overshadowed glimmers of progress in Greece’s negotiations with international lenders to avoid running out of money within weeks and news that Brazil was willing to pump in $10 billion (€7.3 billion) through the IMF to aid Europe.

“Italy is a much bigger deal than Greece,” said Kathy Lien, director of currency research at GFT in New York.

EU competition commissioner Joaquín Almunia has said more European banks may need to be recapitalised as the euro-zone debt crisis deepens.

“The worsening of the sovereign debt crisis, its impact on a fragile banking system and the continuing tensions in funding markets all point to the possible need for further recapitalisation of banks on top of the nine that failed the stress tests earlier this year,” Mr Almunia said in a speech.

Europe has come under increasing global pressure to resolve a crisis that has seen numerous sovereign rating downgrades and financial rescues for Greece, Portugal and Ireland. A bailout of Italy would overwhelm euro-zone resources.

Analysts said the crisis should be addressed by policymakers starting with the US Fed meeting and the G20 and IMF/World Bank in Washington later in the week.

“I think it’s going to necessitate some sort of action by the G20 this weekend,” said Ms Lien.

The US has heaped pressure on euro-zone leaders to act more decisively but received a decidedly cool response.

An EU document, obtained by Reuters, showed the bloc will call on China to boost domestic demand and on the US and Japan to tackle their public deficits as part of global efforts to rebalance growth, suggesting there will be no meeting of minds in Washington. – (Copyright The Financial Times Limited 2011/Reuters)