Banks fail to deliver on growth for markets
OPTIMISM THAT global policymakers would act to ease market stresses and stimulate economic growth helped buoy equity prices and ease flows into highly rated government bonds for much of this week.
However, the failure of the European Central Bank and the Bank of England to deliver on the market’s hopes – and Federal Reserve chairman Ben Bernanke’s lack of explicit commitment to further policy easing – ultimately left the markets disappointed.
“Co-ordinated policy intervention remains as elusive at this stage of the crisis as at any previous juncture in the last three years,” said Ralf Preusser at BofA-Merrill Lynch.
Instead, the week’s most significant policy move came from an unexpected quarter as the People’s Bank of China cut interest rates for the first time since 2008.
The decision came in response to recent signs of deteriorating growth in the world’s second-largest economy.
Qu Hongbin, co-head of Asian economics research at HSBC, said the rate cut had sent out a strong message. “Beijing is determined to take every possible measure to avoid a hard landing,” Mr Qu said. “Get ready for more aggressive easing to be delivered in the coming months – which should generate a modest rebound of GDP growth to above 8.5 per cent in the second half.”
China’s move came hard on the heels of rate cuts in Australia earlier in the week and Brazil at the end of last month that highlighted mounting concerns about the potential impact on the world economy of Europe’s sovereign debt crisis.
Inevitably, Spain remained at the heart of the action as fears for its sovereign finances and banks intensified. “Over the week, it has become even more evident that the difficulties facing the banking sector in Spain are likely to force Spain to accept some sort of bailout programme,” said analysts at Danske Bank. “It is likely this package will come with less strings attached than the previous programmes for EMU countries.”
A closely watched Spanish debt auction – while relatively small – was deemed a success this week as Madrid sold more bonds than its original target range. But the yield on the 10-year paper put up for sale increased to 6.04 per cent from 5.74 per cent at the previous auction in April.
“Obtaining funding from the market at those levels is clearly unsustainable,” said Oliver Wallin at Octopus Investments. The grim outlook for Spain was further highlighted by a three-notch credit rating downgrade on the country from Fitch on Thursday.
Meanwhile, analysts warned that Greece’s difficulties were likely to return to the top of the market agenda next week as the countdown to the June 17th election begins in earnest.