European markets have been trading flat on Thursday, after a brief but dramatic rally on Wednesday as the world's central banks took coordinated action to head off a fresh credit crunch.
Market confidence has been dampened slightly by continuing systemic concerns over Italy's solvency and over the ability of the European Central Bank (ECB) to participate in a bailout of the country.
Central banks in the UK, US, Canada, Japan and Switzerland, as well as the ECB, acted together to reduce the cost of temporary dollar loans in an attempt to free up capital in the global markets. They also agreed on temporary liquidity swap arrangements, which would further allow them to ease pressure in markets in their own currencies.
On the same day, the People's Bank of China also cut reserve requirements for commercial lenders, reducing the amount that they have to hold in liquid assets and freeing up between 350-400bn yuan (£35-40bn) in capital for lending.
Speaking at the launch of the Bank of England's financial stability report, governor Mervyn King said that the move had not been taken to address any specific concerns at a single or group of institutions, as had been rumoured, but in response to indications that funding was becoming too expensive.
The FTSE and major European markets closed up by more than 3%, while the Dow Jones Industrial Average flew up by more than 4%, as did the S&P 500 and the Nasdaq, as American traders kept buying shares into the afternoon.
However, European stocks drifted downwards again slightly in early trade on Thursday morning, with the rally looking over-bought, and with further negative comments from ECB president Mario Draghi.
Ahead of French and Spanish bond auctions on Thursday, and following weeks of political deadlock in the eurozone, spiralling borrowing costs for sovereigns and the near intractable problem of finding a way to fund a bailout of Italy, it is hard to see the action as anything other than an attempt by global policymakers to prevent a European sovereign crisis from becoming a global banking one.
"I think what they're trying to do is protect the banking system, and I think it's a reaction to the fact that the central banks recognise quite how fraught the problems within the eurozone can be," Simon Derrick, chief currency strategist at BNY Mellon. "It's there as a safety net for the banking system, it doesn't solve the problem of structural issues within the eurozone, and particularly whether investors think they will get their money back if they are invested in Italy."
European lenders are major participants in US and global markets, and a rapid "deleveraging" - reduction in their lending - would have a major impact on the availability of credit worldwide, hitting the real economy as businesses run short of working capital and financing for investment, and consumers struggle to get credit. This, as King said on Thursday, is the kind of "spiral that is characteristic of a systemic crisis."
While coordinated action may not solve the underlying problems of solvency in the eurozone, it may at the margin improve confidence enough to stave off a disaster for a few more weeks.
"The latest response is clearly a positive for sentiment and it might encourage thoughts that central banks will eventually do whatever it takes to avert the worst case scenarios further down the road," Deutsche Bank strategist Jim Reid said. "It doesn't however change the poor fundamentals for sovereigns and banks, it just releases some short-term pressure."
At Baring Asset Management, Andrew Cole said: "Yesterday’s move on both sides of the Atlantic is a welcome development and should go some way to resolving this issue, but it remains to be seen to what extent this will encourage banks to make new loans. We believe much more need to be done, particularly from Europe’s leaders, before we can be confident that the situation has stabilised and the fundamentals improved."
Richard Driver at Caxton FX said that the measures show at least that global leaders have recognised the severity of the situation in the world economy. "Adding liquidity addresses a global problem, but there is no doubt that European banks will be the most relieved, he said.
Brian Foran at Nomura offered bull and bear interpretations of the move. Yesterday the markets were keen to believe in the bull interpretation - that short term funding pressure has now been taken off Europe's banks, more easing could be forthcoming and that risk assets would rally.
However, he warned, "We have seen this move before – the Fed introduced these swap lines in September 2008, the S&P 500 jumped 8% in two days, then gave it all back over the next week."
Spain paid a high price at its bond auction on Thursday morning, but there was enough cover on the bids to reassure the market that investors have not totally abandoned hopes that the country can pay them back. France's auction was scaled back, but also attracted relatively strong cover.
All eyes, however, remain on Italy.
"There is a fairly strong conviction that Italy will need a bailout. This was always where it was going to end," Derrick said. "The problem is, how do you provide a sufficiently robust bailout to convince investors?"
There is a consensus figure of around €400bn (£343bn) being talked about amongst investors and some policymakers, but with the International Monetary Fund (IMF) unable to provide the levels of cash needed, and the emerging markets - particularly China - unwilling to stump up the money, there seem to be few options other than the ECB itself, which in theory could print money.
However, the bank's president has said that the institution's mandate is not to finance governments, and the German government in particular has been resistant to changing that.
"It could well be that the ECB does provide the funding, but it doesn't solve the problem, but it goes a long way towards easing the tension and getting back to the fundamental issue of what the eurozone actually is," Derrick said. "However, I'm not necessarily convinced that that will happen. If the ECB says no then we're right back into a series of governments who are refusing to talk to each other. I'm not sure what the outcome of the refusal of the ECB to go beyond its mandate would actually be."
The deadlock is increasing the possibility of an "accident" causing an uncontrolled default or a country exiting the euro, analysts said.
"The solution has to be that the ECB turns on the printing presses or that Germany rips up its own laws and the (Maastricht) treaty and becomes a guarantor, and effectively you get a fiscal union being forced," Derrick said.
In the interim, there is a lack of confidence that stems from a widespread uncertainty. Derrick, a market veteran, said: "Right here and now, I really don't know what's going to happen between now and the end of December, and I think that's where the problem lies."