US Economic data and coordinated action offset banks downgrade


Stocks are rising sharply worldwide, including Wall Street where the Dow Jones is up more than 3.50% while commodities are also recording important gains on the back of global central bank action, a cut in bank reserves requirement in China and better-than-expected economic data in the US.

Risk appetite and the improvement in market sentiment offset yesterday’s downgrade made by Standard and Poor’s of the credit rating of major US commercial banks. On Wednesday US economic data surpassed market expectations, spurring optimism during today’s session and ahead of Friday’s jobs report. ADP reported that the private sector added 206K jobs in November, the largest gain since December 2010. October numbers were revised to the upside from 110K to 130K making it an even better report. Analyst’s consensus is for an increase of about 119K in NFP on Friday. “If Friday’s Non-Farm Payrolls surprise to the upside in similar fashion the labour market in the U.S may start to reverse the declines that have been hampering the U.S recovery,” said analysts from Traders Corner.

The Chicago Purchasing Managers published by the Chicago Business Barometer rose from 58.4 to 62.6, marking the 26th month of expansion. Regarding the housing sector, the Pending Home Sales Index jumped 10.4%. The macroeconomic data fueled risk appetite that was already high following the announcement of central banks. The Federal Reserve said in a statement that US financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. “However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.”

Investors and markets analysts are now considering that the Fed could cut the discount-rate, in order to lower funding cost for institutions facing liquidity problems. Fears of a major global slowdown pushed central banks to take more action in order to provide liquidity but fundamental problems are still affecting the economy. Today’s market mood is optimism but what could happen tomorrow is still highly uncertain.

Dollar plummets in the market

The US Dollar was already lower in the market after the PBOC cut for the first time since 2008 bank reserve requirement, but it plummeted abruptly after the coordinated decision of major central banks. US economic data helped the US Dollar to consolidate losses as it supported risk appetite.

Greenback is trading at weekly lows across the board. Treasury yields are rising considerably as investors sold US bonds in order to increase riskier positions. As long as US economic data continues to improve the US Dollar could weaken further because the American currency remains a global safe haven.

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