As January 2012 drifts into the rearview mirror as a bumper month for world markets, one way to capture the year so far is in pictures – thanks to Scott Barber and our graphics team.
The driving force behind the market surge was clearly the latest liquidity/monetary stimuli from the world’s central banks.
The ECB’s near half trillion euros of 3-year loans has stabilised Europe’s ailing banks by flooding them with cheap cash for much lower quality collateral. In the process, it’s also opened up critical funding windows for the banks and allowed some reinvestment of the ECB loans into cash-strapped euro zone goverments. That in turn has seen most euro government borrowing rates fall. It’s also allowed other corporates to come to the capital markets and JP Morgan estimates that euro zone corporate bond sales in January totalled 46 billion euros, the same last year and split equally between financials and non-financials..
But to the extent that the ECB move was aimed primarily at preventing a seizure of the banks, then one measure of success can be seen in the degree to which it steepened government yield curves in Spain and Italy. A positive yield curve, which measures the gap between short-term and long-term interest rates, is effectively commercial banks’ ATM — they make money by simply borrowing short-term and lending long. This chart then shows some normality returning to the benchmark interest structure.
The problem, as highlighted by bond investor Pimco and others, is twofold. One, how does all this extra liquidity find its way to the real economy if fearful households and companies don’t or can’t borrow more or are still assiduously paying down debts — the suffocating ‘deleveraging’ process scaring investors and policymakers alike? It’s one thing lending back to governments, and that may be a necessary move to prevent economic meltdown, but that’s not going to generate renewed economic activity or job growth on its own. And then, two, what if banks — under regulatory and market pressure to rebuild shot balance sheets — simply refuse to expand “risky” lending again and hoard these cheap borrowings as cash that gets put back on deposit at the central bank?