Help for financial system

12 March 2008

MADRID – The renewed offer of injections of liquidity into the financial system by the central banks of the United States, the European Union and Switzerland gave a big lift to the stock markets yesterday, despite further rises in oil prices.

The Spanish blue-chip Ibex 35 closed the session up 3.17 percent at above 13,000 points. This begs a complex technical question. If the benchmark index were to consolidate above this level it could be concluded that the discounting of the liquidity crisis and a lack of confidence in the financial system has run its course. This, however, would not be the case of the slowdown in the economy.

For some observers the reaction of the markets yesterday highlights the crux of the problem, and frees investors to focus on other essential issues, in particular the impact of prices down the road on monetary policy, consumption and corporate earnings.

Yesterday’s sharp gains, the third biggest in the year so far, were led by market heavyweights in the Ibex 35 and a number of other companies whose share prices have not reflected recent news because of the negative sentiment weighing on the overall market.

Other stocks trailed this time around, although they could join in the rally provided the Ibex 35 remains over 13,000 points over the next few sessions.

On the indicators front, the economic expectations index in Germany in March climbed 7.5 points but still remained in negative territory. This figure, along with the industrial production data for euro-zone economic powerhouses for January backed the idea of a simple slowdown in the bloc, although it is too soon to extrapolate conclusions from such scant information.