The Federal Reserve along with 5 other central banks announced Wednesday morning that they were opening up their swap lines with banks to provide liquidity (known around these parts as bailing out) and help smooth out the sovereign debt crisis sweeping through Europe. The Fed along with the ECB and the central banks of the UK, Canada, Switzerland and Japan agreed to lower the cost of borrowing from the Fed by 0.50%.
From the moment of the announcement at 8am in New York, markets responded with buying. Commodities, metals, stocks all took off like the exchanges were on fire. Gold ended the day up nearly 2% to $1752.70/oz. Silver moved up sharply to test $33/0z. while West Texas Intermediate Crude pushed back through $100/barrel and held there all day.
This was the signal the markets had been waiting for. A move by the Fed to provide liquidity to the market means that the perceived tightening phase is over. Consequently, capital flew out of U.S. treasury bonds which were sold like they had the plague. The yield on the 30 year Bond rose to 3.062% up 0.106% on the day. Among the big winners on the Dow were IBM(NYSE:IBM) and Caterpillar (NYSE:CAT) as both were up over 7%.
While this is an encouraging first step from the perspectives of the markets, the enormity of the debt crisis in Europe is bigger than what was announced today. Between this and the announcements of the IMF’s involvement with the ECB to channel money to troubled EU members that was enough to lift the pall overhanging the capital markets so far this week.
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