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Ominous Response To Global Central Bank Actions!

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    September 21, 2012

    Japan’s central bank was the latest to announce additional monetary stimulus measures. Tuesday night the Bank of Japan surprised markets by increasing the size of its asset purchases program by 10 trillion yen ($126.7 billion) to 80 trillion yen.

    The Japanese Nikkei was up 1.2% Tuesday night to a new rally high in reaction to the announcement. But so far it was a one-day rally, with no follow through. The Nikkei plunged back down 1.6% last night. Its problem was last night’s report that Japan’s exports fell again and its trade deficit widened again. Japan’s exports to its largest trading partner, China, declined 9.9%, while exports to the euro-zone plunged 22%.

    The Bank of Japan’s new stimulus effort also had most Asian stocks up Tuesday night in reaction. But they also plunged last night with no follow-through, in reaction to the report last night that like Japan, China’s economy also continues to slow much more than previously expected.

    China’s economic slowdown looked awful in August when its HSBC PMI Index fell to 47.6, below the recessionary mark of 50 for its 10th straight month of contraction. Last night’s report was that the contraction continued in September, the Index coming in at 47.8.

    In reaction, after rallying Tuesday night in response to the Bank of Japan’s additional stimulus announcement, China’s stock market plunged back down 2.1% last night, to another new bear market low, now down 41% since its brief new bull market after the 2008 financial crisis was aborted in mid-2009. 


    Meanwhile, in Europe, markets had a big 2-day spike-up rally in initial reaction to the ECB’s surprise ‘whatever it takes to save the euro” decision on open-ended bond buying. But there was no follow through until a one-day spike up last Friday in reaction to the Fed’s QE3 decision in the U.S. And now no follow through to that this week.

    And in the U.S., the market is down so far this week, no follow through to the U.S. market’s initial 2-day spike-up reaction to the Fed’s decision last week.

    Is it that the global central bank actions had been hoped for, anticipated, and factored into markets in the big rally from the June low, and now it’s going to be a case of buy on the rumor and sell on the fact?

    Or is it that with the focus on hoped-for action by central banks having been satisfied, that markets will return to focusing on the normal driving forces of markets, the direction of economies and earnings?

    If it’s the latter the lack of follow through to the central bank efforts could be ominous, since there are no signs of economic or earnings improvements in Asia or Europe, as indicated by the reports last night from China and Japan.   


    And in Europe this morning the Markit Flash Eurozone PMI report was that it plunged from 46.3 in August to 45.9 so far in September, a more than 3-year low. Markit’s Chief Economist Chris Williamson said, “We had hoped the news regarding the ECB’s intervention to alleviate the debt crisis would have lifted business confidence, but instead sentiment appears to have take a turn for the worse as companies adjust to weaker demand.” 

    A potential worry is that if economies and earnings continue to deteriorate and central banks have already fired off their most aggressive ammunition, what would investors have as hopes for rescue? Those thoughts could cut quickly into current bullish ‘no fear’ investor sentiment.




     Subscribers to Street Smart Report: The new issue of the newsletter is in the subscribers’ area of the Street Smart Report website from yesterday.

    To read my weekend newspaper column click here: Enough With The Fed’s Transparency Already! September 14, 2012.

    Images: Flickr (licence attribution)

    About The Author

    Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!