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From regulatory ranting to yet more global financial intervention

01 December 2011 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

Yesterday’s newsletter titled Does treating the adviser fairly extend to the FAIS Ombud?” drew a huge response… Apart from the dozen or so comments posted directly to our website we also received a handful of email replies to the question: Would the financial services industry be safer if the Financial Services Board (FSB) investigated and approved new financial products before they came to market? As always our readers raise a number of interesting points. It’s going to take a day or two to get through these responses, so please watch your inbox for our follow-up on the topic early next week…

To allow tempers to cool slightly we’ll shift focus from the domestic regulatory environment to a global financial system intervention that sent world equity markets into orbit yesterday! Investors were so enamoured by the latest “rescue” announcements they embarked on a buying frenzy the likes of which we haven’t seen for some time. As the closing bell sounded on Wednesday 30 November 2011 the US Dow Jones Composite index was 388 points to the good – up 3.4% for the day. Shares on major European bourses responded positively too – with the UK FTSE up 3.2% and the German DAX surging an unbelievable 5%. Local investors weren’t left out with the rand gaining ground against the US dollar and the JSE All Share index jumping 3.72% to close at 32813 points… What triggered this buying frenzy? And is it sustainable?

A coordinated effort to provide liquidity to global financial markets

The reason for the massive swing in investor sentiment is clear for all to see. Central banks in Canada, England, Japan, Europe, Switzerland and the US Federal Reserve announced coordinated actions to enhance their capacity to provide liquidity support to the global financial system. And they’ve lowered the cost to banks availing of this cash! “The central banks will reduce the pricing on the existing temporary US dollar liquidity swap arrangements by 50 basis points,” observes Kevin Lings, economist at StanLib. “From 5 December 2011 the rate will be the US dollar overnight index swap (OIS) rate plus 50 basis points.” The authorisation of these swap arrangements has been extended to 1 February 2013.

To paraphrase Lings: The arrangement has been structured in such a way as to establish temporary bilateral liquidity swap arrangements in each jurisdiction and in any of currency should market conditions so warrant. What does this economic jargon mean? The simplest explanation we can cook up is that the central banks have stepped in to provide a liquidity backstop for banks afflicted by the Euro-zone’s economic woes. Going about our business at the Southern tip of Africa we quickly lose track of how serious the US and European debt crisis is. Things are so bad that companies in the region have drawn up contingency plans in the event their countries have to abolish the Euro and begin conducting business in their own currencies once again.

Lings draws positives and negatives from the central bank decision. “The coordination among the world’s central banks is impressive, and if taken together with China’s decision to reduce their Bank’s reserve requirements, the initiative is encouraging,” he said. On the negative front: “The announcement also indicates that the central banks have become increasingly concerned about the liquidity constraint in the Euro-area…”

Investors might have jumped the gun again

“The purpose of these measures – according to the Federal Reserve – is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses,” opines Lings. If we read between the lines then it is clear investors have jumped the gun by piling back into equities. The debt-laden West (especially the US and the so-called PIIGS) are still swinging precariously from the trapeze. And the small safety net created by yet another liquidity injection will barely be sufficient to safeguard all stakeholders should one (or more) of these economies fall!

Unless investors take a longer-term view on equities the current market volatility will continue well into 2012. Retail and institutional investors, fund managers, pension fund members and financial advisers will have to get used to the huge day-to-day price swings in our Top 40 listed companies. They will pop the champagne corks on days such as 30 November 2011, when shares such as Investec (+6.9%), African Rainbow Minerals (+6.6%), Impala Platinum (+5.8%), Exxaro (+5.8%) and Absa Bank (+5.7%) shoot the lights out… But they’ll suffer through the hangover of this excess a few days hence – when debt concerns resurface – and today’s winners give back their ill-timed gains.

Editor’s thoughts: The efficient market hypothesis holds that market prices incorporate and reflect all relevant information at a given point in time… One way to dismiss this hypothesis is to consider the price action of markets as access to information improves thanks to technological advances. Perfect information – instead of smoothing prices – creates ridiculous levels of volatility. Is short-term positioning and speculation by institutional fund managers contributing to today’s excess volatility? Please add your comment below, or send it to gareth@fanews.co.za

Comments

Added by Ingrid Denzin, 01 Dec 2011
Is short-term positioning and speculation by fund managers contributing to excess volatility? Yes, absolutely, so steer clear. I welcome the FSB's increasing stand on regulation. They should have been doing this years ago, then we wouldn't have had disasters like Sharemax sending the fan directed stuff flying all over the place. Put up your profile on FindAnAdvisor and the con artists are onto you like a shot. You can get enough of it.
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