Stocks jump for third day after Central Banks free up dollars to fill liquidity holes

European stock Indices climbed strongly for a third straight session on Thursday, boosted by coordinated action by Central Banks to keep banks liquid at a time when a severe drop in confidence meant that European banks had started to limit lending to each other.

Central Bank action lifts optimism
Today’s move by the ECB, BoE, Federal Reserve, BOJ and SNB to extend three-month dollar loans at fixed rates until the end of the year is clearly a move to shore up bank liquidity at a time when Europe is struggling to contain the sovereign debt fall out.

The market reaction to the decision was quick and bullish, seeing European indices gain another 1% in a matter of minutes and helping the FTSE 100 to close higher on the day by over 2%.

Much of the gains were led by Europe’s banks, with investors seeing the move as a positive one in helping struggling banks to shore up any liquidity holes until the end of the year, by which time it is hoped that Europe’s leaders would have got their act together and enforced strong action to combat the sovereign debt crisis.

French banks, which have been hit hard recently by mounting concerns over liquidity immediately saw a bounce, with shares of Societe Generale, BNP Paribas and Credit Agricole rallying between 5% and 11% on the day.

The euro also saw strong gains, with investors buying into the single currency which rose 0.9% against the US dollar and 0.6% against the pound sterling.

One cannot help think that the coordinated Central Bank action shown today to plug any liquidity crisis flies in the face of much of the rhetoric we have seen lately that there is no liquidity crisis at Europe’s banks. Today’s action appears to contradict that but nevertheless, the action has thus far been seen as a positive by investors.

Much of the lift we have seen in European markets will now be dictated by market confidence that European leaders can rally behind Greece and prevent the indebted nation from a default.