Wednesday, August 15, 2007

Aftermath of the Capital Injections by the World’s Central Banks

The central banks are in the process of cleaning up all the capital that injected into the markets last week. Some central banks are in the process of getting their money back, while the Fed and the Bank of Canada were injecting small amounts (small is a relative number, I would be happy with 0.1% of what the Fed injected). Once again the conditions that caused the capital to be injected have not gone away, so injections in the future are a definite possibility. By the way, the anticipated rate cut by the Fed of 25 bps by October will not save the market. Continuing their policy of injecting cash as needed will help the market more than than a rate cut. From Yahoo:

Central banks in Europe and Japan on Wednesday mopped up cash poured into money markets to quell a global credit storm, but in Canada and the United States there were more measures to shore up liquidity.

The Bank of Canada stepped in after a day on the sidelines of the money market, and the Federal Reserve added $7 billion in temporary reserves as losses in the U.S. subprime mortgage market sent Wall Street stocks slumping again.

For the first time since it began pumping extra cash into Europe's money markets on Thursday, the European Central Bank gave no extra short-term money to keep the financial system operating smoothly. Central banks in Japan and Switzerland actively drained cash from their local markets after injections of liquidity in the past week.

However, emerging market Asian central banks took steps to smooth trade in the region's currency markets as ongoing credit fears hit stocks and sent the yen to a 4-1/2-month high, as investors unwound carry trades involving borrowing in yen to invest in higher yielding securities elsewhere.

Analysts warned that the credit squeeze and liquidity problems were spreading.
"The turmoil in financial markets continues with a greater contagion in Asia, emerging markets and investment grade credit," Tullett Prebon G7 economist Lena Komileva said.

Signs of credit bottlenecks have led investors to scale back expectations for interest-rate increases or, in the case of the Fed, have raised expectations for an ease.

The Fed's action was modest compared with the $38 billion it poured into markets on Friday, the largest amount injected since just after the September 11, 2001, attacks. But dealers said it was a reminder the Fed remained alert to market needs.

The Bank of Canada injected C$350 million ($330 million) of repurchase funds and left the market flush with cash at the end of the day. It left a C$500 million balance in the Large Value Transfer System, which allows easy balance settlements by banks, up from the normal C$25 million. It said it plans to do the same on Thursday.

But ECB President Jean-Claude Trichet said on Tuesday money market conditions had progressively returned to normal, although the central bank would continue to watch developments closely.

Central banks in Malaysia, Indonesia and the Philippines were suspected of intervening once again on Wednesday though, selling U.S. dollars to slow the declines in their currencies.

No comments:

Post a Comment