How the markets see it

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european central bank
A huge euro logo is seen in front of the headquarters of the European Central Bank (ECB) in Frankfurt, Germany. Photo – Ralph Orlowski/Getty Images

The failed opportunities by European Central Bank and the Federal Reserve are pointing towards a track for necessitated action that has to be taken sooner rather than later. After last week’s inaction, there are growing calls everywhere for either of these bodies to give a much needed support to the global economy. The case is made stronger by release of more dismal economic data which shows that things are getting worse with investor confidence in European sovereign bond standing at an all time low. The domino effect started from bonds for Greece, Spain and Italy. However, as the crisis prolonged, the effect is now shifting towards safer economies like Germany and Holland. The recent downgrade of Greece by Standard & Poor’s to negative outlook just compounds the already known fact that things are getting worse and worse. Across the pond, same is being seen in US where economic data recently showed rising unemployment rates and every uptick of the rate is making action more urgent.

The reaction of the markets can either be called resilient or risky considering how you look at it. On the one hand, the cycle of inaction that the central banks are taking does not seem to deter the investors. Till now, more than a few times, the markets have looked towards the central banks to take substantive steps to rectify the situation by rallying just before the announcement. The rally fizzles out, however, as the policy makers fall short of what was expected of them and investors book their losses only to be motivated again when the next announcement comes round. This shows that investors have belief in the market and the banks to do the right thing and are not willing to back down.

On the other hand, this optimism can also be seen as a risky manoeuvre as investors are doubling down on their sentiments by hoping that things would improve this time round. This leads to a hubris which can lead to bigger and bigger losses accumulating in the books and weighing down on the exposures of the traders.

Asian markets have again started rallying to a three month high on early Thursday trading after Chinese inflation saw a drop despite the expansionary policies being pursued by Beijing. This means that if more action is required, the country has the capacity to carry it out. This was also backed by a rise in the employment figures for Australia which is doing so without any policy support for the time being. Even though the data is looking upwards, this rally comes on the hope that European policy makers will take a more concrete decision on the eurozone debt crisis this time round.

European indexes are expected to rise after Wednesday’s bearish trend and aided by the Asian markets performance. The markets expect that the ECB would soon start buying sovereign bonds in order to decrease borrowing costs while Fed is still expected to carry out monetary easing. It is still to be seen whether the policy makers follow through on any of the expected action that is promised or expected.

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