Who needs a summer amusement park? The stock market roller coaster gave us thrills aplenty this past week, all without ever leaving your computer screen. From its best single-day gain this year on Tuesday, Toronto’s S&P/TSX Composite had given just about all of it back by Friday’s close. Even some significant central bank rate cuts in Europe and China weren’t enough to dispel the gathering gloom.
Last week’s flap over rate-fixing shenanigans in the UK’s London Interbank Offered Rate (Libor), which is essentially the rate that banks charge each other for short-term loans, got tongues wagging in boardrooms and on trading floors all around the world. The Libor rate also guides pricing on derivatives contracts, mortgages, and corporate debt, which in total amounts to trillions of dollars in the global financial markets. Any allegation of price fixing by Libor participants is thus taken very seriously, even if it seems rather arcane to us mere mortals.
One of the world’s biggest banks, Barclays Plc (LSE: BARC), parted company with its CEO and some other key executives as a result. Even Royal Bank of Canada (TSX: RY) got sucked into the maelstrom, going so far as to release a statement last week saying it followed all the Libor rules and denying that it was involved in any “collusion” whatsoever.
Meanwhile some of the world’s biggest central banks pulled the trigger on further easing monetary policy. You can be forgiven for wondering if the term “easing” actually means anything any longer, when rates in developed countries are at or near zero already, and the central bank balance sheets have ballooned to previously unimaginable sizes. The European Central Bank cut its policy rate to a record-low 0.75% last week in an effort to combat the spreading eurozone recession. Ditto for the People’s Bank of China, which cut its policy rate 31 basis points, to 6%, last week. And Denmark, a member in good standing of the EU and the eurozone, cut its deposit rate of negative 0.2%, while so that institutional depositors are actually paying for the privilege of parking their money at the bank. Over in the UK, where the policy rate is already at a record-low 0.5%, the Bank of England announced a further €50 billion asset purchase (i.e., money printing) program.
It all highlights the anxiety that governments are feeling about the growing economic slowdown. More evidence of that came last week, as the US Labor Department said that only 80,000 new non-farm jobs were created in June, higher than May’s 77,000 figures, but far from the 200,000-plus monthly numbers needed to support sustained expansion. The US unemployment rate remained stalled at a lofty 8.2%. In addition, June’s manufacturing gauges slumped, as the purchasing manager’s indexes in Europe, the US, and China all dropped below the 50 threshold between contraction and expansion.
Naturally, by the end of the week, markets had lost much of their earlier enthusiasm of purported eurozone “agreements” and expectations of money printing by central banks. Most hovered just around the breakeven mark for the week, as investors await quarterly earnings reports and wonder about the marked absence of earnings “guidance” from companies this time around.
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