Central Banks Have Panic Attack

Global economic data continues to be dismal and on Thursday, global central banks responded with what looked like a coordinated effort at monetary easing designed to prop up a weak global economy.

The European Central Bank dropped its benchmark to 0.75%, a record low, as Mario Draghi warned of downside risks ahead.

The Bank of England joined in the easing efforts as it undertook another program of quantitative easing and the Peoples Bank of China made another cut to its lending rate to spur economic activity in China.

The Bank of England took the most dramatic action with a new effort to print money and buy $78 billion worth of assets to prop up the rapidly weakening British economy.

All participating entities denied hints of coordination in yesterday’s action but the timing was clearly noticeable as central banks seem to be having a panic attack over the rapidly deteriorating global economic environment.

The post European summit euphoria seems to have worn off as Spanish and Italian bond yields spiked higher on Thursday while economic reports in the United States remained dismal. The only bright spot was that unemployment claims in the United States declined for the week but that was offset by the weakest ISM services reading in more than two years and a weak June retail sales report that showed an increase of 0.1%, widely missing expectations and the smallest gain in almost three years.

So investors again look to global central banks to ride in and save the day. Three big ones acted yesterday and last month the US Federal Reserve extended its Operation Twist with its next meeting scheduled for the end of this month on July 31-August 1.

Markets generally respond enthusiastically to such central bank moves, however, today most global equity indexes are in the red as monetary intervention appears to be losing its effectiveness. Interest rates are at historic lows while quantitative easing programs have yet to turn the economic recovery into a robust event. Recession is rapidly stretching across Europe and China is in a sharp slowdown. These two factors can only be a drag on US growth and corporate profits since approximately 50% of S&P 500 earnings come from overseas markets.

In addition to decreasing its main interest rate, the ECB also reduced the interest rate on its lending facility to 1.5% and to 0% on its deposit facility.

Generally announcements like yesterday’s would generate a rally, however, yesterday’s market action is quite the opposite with declines in most regions.

The Eurodollar declined more than 1% to $1.2390 with the decline also reflected in CurrencyShares Euro Trust (NYSEARCA:FXE) posting a mid-day decline of -1.75%.

European stock indexes were mostly in the red with the DAX off 0.45%, the Stoxx 50 declining 1.2% and the FTSE 100 gaining 0.14%.

European ETFs posted sharp declines at mid-day with iShares MSCI Spain Index (NYSEARCA:EWP) dropping -4.6%, iShares MSCI Germany Index (NYSEARCA:EWG) shedding 2.1%, iShares Italy Index (NYSEARCA:EWI) losing 4.3% and Vanguard Europe Index (NYSEARCA:VGK) slipping 1.9%.

Bottom line: Global markets grow more fearful as central banks act and nothing happens.

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