Yesterday, the European Central Bank (ECB) – flush with cash from lines of credit from the U.S. Federal Reserve – swung into action!
The ECB pumped an astonishing one-half trillion dollars into the global financial system on Tuesday. And what did that vast amount of money buy the ECB? Nothing but a lousy 0.08% loss in the DJ EURO STOXX 50 Index of leading Eurozone stocks, that’s what!
The ECB cash injection did a bit more good to cheer up shares on Wall Street however, leading the S&P 500 Index to a 0.6% gain. However this was a rally full of fits and starts that included several round-trips from positive to negative territory and back again.
After two days of very heavy selling on Friday, and again on Monday, some investors went bargain shopping yesterday. But those bargain buyers appeared to be just as finicky as shoppers at the mall this Holiday season.
In spite of the massive liquidity being provided by the major central banks, credit conditions are not yet back to normal. The chart above vividly shows that U.S. dollar Libor rates, a key interbank lending rate, inched down somewhat yesterday from recent highs, settling at 4.95%.
But that rate isn’t much reduced from the 5.33% U.S. dollar Libor rates posted on August 1st. Keep in mind that over this time frame the Fed funds rate has been cut three times, by a total of 1%. Typically, Libor rates would be hovering just above the Fed’s current benchmark rate of 4.25% -- if credit markets were back to “normal.”
Today we will learn the details of the Fed’s $20 billion auction that took place Monday. And on Thursday, the Fed will auction off yet another $20 billion.
Keep an eye on Libor to see the “real-world” reaction to the Fed’s easy money moves.
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