Wednesday’s 400-plus point jump in the Dow following news the world's major central banks are taking further coordinated action to reduce the interest rate on dollar swaps shows the market is hungry for action to resolve the euro zone debt crisis, according to analysts at Barclays Capital.
The news added to some positive US economic data on jobs and housing and stocks saw heavy buying amid strong volumes.
“In both cases, it is not easy to make a case that the magnitude of the news quite justifies the magnitude of the global market reaction,” said Michael Gavin, the head of emerging market strategy at Barclays Capital in a research note on Thursday.
ADP jobs data is a noisy indicator of employment growthaccording to Gavin, who warns one month’s employment data should not change people’s view of the US economic outlook.
“A 10 percent increase in pending home sales looks impressive, until you have a look at the volatility of the series, and the base of comparison,” he explained.
The 50 basis point cutin the Chinese reserve ratio by the People's Bank of China indicates Beijing is ready to act to support growth, according to Gavin. But he questions whether such a move should result in the risk-on trade markets saw on Wednesday.
“Much the same can be said of the coordinated cut in the interest rate on dollar swaps. This addresses a real problem—the liquidity shortfall in important parts of the European banking system created by what we see as a slow-motion run on European banks by money-market investors ,” Gavin wrote.
“But it does not address the underlying causes of the withdrawal, just reduces by 50 basis points the cost of the officially provided substitute liquidity and extends the program into 2013.”
For months, the market has been subject to weak or static drivers, according to Gavin.
“It is because they have been subject to very powerful but contradictory pressures, driven on the one hand by deep anxiety about weak fundamentals and substantial tail risks, but offset on the other hand by an equally powerful market context created by bearish sentiment and defensive positioning.”
“Market participants seem as fearful of missing a market updraft as they are of getting caught in a downdraft. Nothing new here, but something to remember next time markets seem to be in a 'meltdown' mode,” he wrote.
Next week's EU heads of state summit in Brusselsnow takes on huge significance, according to Gavin.
“Some investors, at least, seem to have come around to the view that things have finally become scary enough to expect EU policymakers to address the underlying problems more definitively than they have been able to do so far. We think the stakes are high in the policy announcements that are made in the coming week,” he wrote.