Co ordinated Central Bank action to support liquidity triggers FTSE surge

Six Central Banks including the Federal Reserve, European Central Bank and the Bank of England united today to help support liquidity strains in the market, triggering a sharp rally in UK banking stocks and the FTSE 100.

The co-ordinated action lifted the FTSE 100 strongly in afternoon trade, with the UK Index closing at 5505, higher by 168 points or 3.16% on the day.

The Bank of Canada, Fed, ECB, BOE, BOJ and Swiss National Bank confirmed in a statement at 1pm London time that they would lower the pricing of dollar liquidity swaps by 50 basis points to help prevent a global liquidity crisis. The ECB also moved to cut the initial margin for three month dollar operations from 20% to 12%.

The move was a bit of a surprise today and helps support market sentiment chiefly in two ways.

First and foremost, it is designed to support liquidity and prevent a liquidity crunch globally. By making money flows easier and less restrained, it is hoped that this will not only increase confidence in the interbank lending markets but also that the liquidity will funnel down into small to medium sized businesses.

Secondly, it is a huge shot in the arm for the badly beaten investor in the midst of a sovereign debt crisis and fears over global growth. This sends a clear and sincere message that the major Central Banks of the developed world have a strong determination to bring financial markets back from the brink and increase liquidity in the financial system. At a time when European leaders are failing to act, Central Banks are stepping up to the plate and this is giving investors a much needed confidence boost.

Today’s announcement however is not the magic medicine to solve the worlds financial crisis, but it is a big step in the right direction and investors in the city have cheered the move by buying into banks, insurers and mining stocks.

The co-ordinated move comes fast on the heels of China cutting the bank reserve requirement ratio by 50 basis points earlier in the day, which marks a change in monetary tone that could follow with rate cuts over the coming quarters to keep the world’s fastest growing economy growing.

FTSE rallies 100 points on the move
The instant reaction to the Central Bank action was a big jump in share prices, with investors trading on the front foot and picking up banks and insurance stocks, which benefitted particularly, triggering a 100 point rally in the FTSE 100 within a few minutes.