What Will Central Banks Do When the Markets Open?
Stocks rose on Friday amid talk that central banks across the world were ready to undertake coordinated action to ease market tensions caused by the Greek election result.
Exit polls are indicating the pro-austerity New Democracy could win the popular vote but still need the support of other parties to form a coalition government.
This result, if confirmed, could be seen as market positive, but some investors could still be hoping for a policy response from the world’s central banks. Whether this comes before the market opens or later this week, analysts believe the ability of the ECBand FOMCto ease market tensions is not what it once was.
“There isn't much that central banks can really do other than offer liquidity,” said Megan Greene, the director of European economics at Roubini Global Economics told CNBC.com on Sunday.
Greene believes this could buoy markets for only a couple of days. “It will do absolutely nothing to address any of the underlying fundamentals”
Mario Draghi said on Friday the ECB is ready to provide support for the banking system if required, and could have overplayed his hand according to one analyst.
“By leaking their intentions at the end of last week the central banks have lost the one option which could have worked in their favour” said Steen Jakobsen, the chief economist at Saxo Bank, who is watching capital flight very closely.
“The thing to watch is the capital flight in Greece, but also Spain. A sudden increase in cash withdrawal will bring the central banks in panic and we could see an inter-meeting ECB cut,” Jakobsen said.
With the market consensus for some kind of easing from the FOMC at 80 to 90 percent, in Jakobsen’s opinion, the Greek election result will determine the size of any Fed action.
“A negative Greek election will bias the FOMC toward more than less (intervention) as Bernanke likes to think of himself to be pre-emptive” said Jakobsen.
Simon Derrick, the chief currency strategist at Bank of New York Mellon agrees all the central banks can do in the short term is provide liquidity.
“The only thing the ECB can do in the longer term is to suit monetary policy to the periphery rather than the core. Unfortunately, this wouldn't provide a solution, it just shifts the nature of the crisis,” Derrick said.
Paul Donovan, the deputy head of global economics at UBS, believes central banks will only react to disorderly markets.
“This was an election offering the Greek people a choice between a party that wanted to renegotiate the terms of the bailout while staying within the Euro, and a party that wanted to renegotiate the terms of the bailout while staying within the Euro. I don't see markets becoming disorderly as a consequence of the election,” Donovan said.