The equity market is on tear today (currently up over 3%) and traders have all turned bullish. In yesterday's blurb, I noted that if European central bankers would announce some measures to stop the contagion, and we had a decent jobs #, then watch out for a solid rally to end the year.....well, today all the global central banks (Federal Reserve, Bank of England, European Central Bank, etc.) agreed to lower the pricing on liquidity swaps (eg temporary dollar loans to banks) by a half % point. What this has done is to add liquidity into the banking system in Europe by increasing the access to US dollars. What started in Europe as a solvency problem, has begun to make its way into a liquidity problem (similar to what happened during the 'credit crunch' in US in 2008). What this measure does is to add liquidity (e.g. credit) into the banking system in Europe. Then we had an outstanding ADP jobs report which blew away expectations, so now "risk is on" and the market is moving higher.
The one thing to note is that this move by the central bankers doesn't in any way solve the fact that their countries are over leveraged (eg too much debt), but it does give them more time to resolve this issue. Then, China came out and reduced its reserve requirements by 0.5%, which is a measure to loosen monetary policy (e.g. drive GDP growth).
I look for a continued rally in equities going into the year-end, with your cyclicals outperforming (eg Caterpillar, Deere, FedEx, any mining stock, e.g. 'Rio Tinto' etc.). Investors will put the European sovereign debt issue on the back-burner for now, but it will come back, I just look for it to be back on investors minds after earnings in Feb 2012. Until then, hopefully we can enjoy this rally.
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