Rumor of Possible News of Possible Action Gives Market a Boost

The stock market got a sudden spike late today on a report from Reuters that central bankers were planning coordinated action if the Greek elections this weekend caused more market chaos. Check out the action after 3 pm.

Honestly, I was pretty skeptical of the news but here’s the report from Reuters:

Central banks from major economies stand ready to take steps to stabilize financial markets by providing liquidity and preventing a credit squeeze if the outcome of Greek elections on Sunday causes tumultuous trading, G20 officials told Reuters.

A senior U.S. official cautioned that the Greek election will not provide “the definitive signal on what happens next” in the euro zone debt crisis.

But if severe market strains emerge after an unusual confluence of three elections this weekend – there are important polls in Egypt and France as well – central bankers are on standby to ensure enough cash is flowing through the financial system.

“The central banks are preparing for coordinated action to provide liquidity,” said a senior G20 aide familiar with discussions among international financial diplomats. His statement was confirmed by several other G20 officials.

Wall Street stocks jumped sharply on the news, with the S&P 500 and the Dow Industrials both up more than 1 percent. The euro added to gains and U.S. government debt prices fell, boosting yields.

Separately on Thursday, British finance minister George Osborne said the government and the Bank of England will act together with new monetary policy tools to tackle tightening credit and financial market conditions triggered by the euro zone crisis.

A move to boost liquidity by central banks could mark a dramatic backdrop to the G20 summit of world leaders, who will gather in Los Cabos, Mexico, on Monday and Tuesday, with Europe’s escalating crisis topping the agenda.

The key takeaway is how sensitive the market is to action from the authorities. In a few minutes, the S&P 500 added about $100 billion in market cap. This means the rumor of promises may have a high return on equity for governments. In fact, if the rumor works well, then you may never have to deliver.

Posted by on June 14th, 2012 at 5:03 pm


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