Too much help hurts

14 December 2007

MADRID – The stock markets yesterday made a very negative reading of European and North American central banks’ decision to inject liquidity into their financial systems. Investors view this move as an indication of the extent of the liquidity crisis being more far-reaching than had previously been thought, and opted to pull back.

The blue-chip Ibex 35 index lost 2.27 percent in the session to close below 15,500 points, while the Ibex Medium Cap was down 2.73 percent and the Ibex Small Cap off 1.57 percent.

The intention of the central banks was to send a calming message to financial markets fretting about a stream of news about the fallout from the US subprime mortgage crisis. It is curious that the reaction of the market has been just the opposite of what had been sought, and has in fact sparked another crisis.

This time around, to say that investors took the opportunity yesterday to take profits falls short of the mark. The alternative view that at times intemperance gets paid its just desserts might be closer to the mark.

Assuming that financial institutions will be given all the help they need, the background situation is one in which economies have been weakened by oil price rises. Many analysts are now coming to the view that the current economic and stock-market cycle has run its course. The fact that the industrial price index in the United States rose by the biggest amount in 34 years in November could be a reflection of this.

In the case of the Spanish market, the Ibex 35 has broken through support at the 15,500-point mark. This raises the possibility that its recent sideways trend has run its course, with the index now facing levels of between 15,200 and 15,300 points.

Subject: Spanish news