Central Banks Might Have Another Hand to Play in This Greek Inspired Epic

So the crunch weekend has come and gone, and as the headlines said - "Greece has voted to stay in the euro". Despite what you might have read, these Greek elections were never going to present the world with a solution to the eurozone crisis and, at the time of writing, they haven't even given us a day's worth of gains in markets.

So the crunch weekend has come and gone, and as the headlines said - "Greece has voted to stay in the euro". Despite what you might have read, these Greek elections were never going to present the world with a solution to the eurozone crisis and, at the time of writing, they haven't even given us a day's worth of gains in markets.

The shelf-life of good news is getting increasingly shorter where the eurozone is concerned.

The outcome the market had been dreading (a victory for the anti-euro brigade) failed to materialise and the result is a basic re-run of the last election. This means that, although it may be too early to tell for certain, the need for centralised policy intervention from the world's central banks can wait for a little while.

There have been calls for central banks to increase liquidity further in recent months. However, they have been reticent to do so as of yet. The ECB gave no hint of further LTRO cash, whilst at the Bank of England they have decided on a more focused scheme for businesses as opposed to the typical bond buying program it has been part of in recent years. The focus now shifts to the US Federal Reserve and their meeting on Wednesday night.

The split in views of analysts is fairly wide for this meeting, with some parties predicting no more easing at all from the US authorities, while others are looking for a massive injection. The reasons are simple and well-known, financial headwinds from the crisis in Europe combined with dwindling confidence and a sense of "what's next" has hammered the incentive to spend. This summer has drawn massive parallels with the same period last year. A promising start fading as concerns over Greece saw risk run for the hills, growth suffered and the banks eventually threw more cash at the problem.

The Fed have been cagey in communications, both verbal and written, about the prospect of another round of economic stimulus leading some to believe that they are trying to wean the market off the artificial high that these open-market operations provide.

Unfortunately, and especially in an election year, the pressure to act may overcome their desire to restrain the market. US growth was surging ahead at the beginning of the year but has since tailed off rapidly emphasising our fears that while this will be the second recession in a row for the West, the Far East will now be invited to the same depressing party.

The economy is the battle ground for every election out there at the moment and the US presidential run-off is unlikely to be any different. Indeed the focus of things will shift from Europe to the US come the end of the year, as the race for the White House will throw politicians back into the limelight. Meanwhile, in the sub-plot of this epic story with seemingly no end, central banks may have to help the markets out just one more time.

Close

What's Hot