G20 Agreement and US Talk Drives Stocks Higher

Stocks rose during Asian trading this morning as agreement was reached during the G20 Summit in Mexico to do more to prop up the global economy and expectations grew that the U.S. Federal Reserve will make known later during the day policies to stimulate the economy via easing measures.

 

The G20 meeting ended with commitments for increased global support to find an end to the European debt crisis and boost regulatory oversight with world leaders saying they would take “all necessary measures” to protect the euro area. President Obama said that European leaders recognized that “bold and decisive” action was required to deal with Europe’s debt crisis. This was welcome relief on a day when Spanish borrowing costs on 12 and 18-month bonds shot up to 5.1% at its first debt auction since securing a 100 billion euro bank bailout. The Spanish Govt managed to raise the intended 3.04 billion euros but the interest rate payable increased from 3% at a similar debt sale on the 14th May. Only the day before, the interest rate, or yield, on benchmark 10 year bonds from the eurozone’s fourth-biggest economy hit a record high of 7.1%. Rates more than 7% are widely viewed as unsustainable with Greece, Portugal and Ireland all having to seek international aid to pay their loans when their bond yields reached similar levels.

 

Over in the US, the Federal Reserve is half way through a two day monetary policy meeting with talk increasing that the U.S. central bank will make moves to stimulate the economy through either outright bond purchases from banks, ie as quantitative easing, or by extending a $400 billion program rearranging its Treasury holdings, as part of  Operation Twist. Under Operation Twist, the Fed sells short-dated Treasury instruments and buys longer dated Treasury instruments at the same time with the intention of pushing down long term interest rates.
Unlike quantitative easing, Operation Twist does not expand the Fed’s balance sheet and fuel as many inflationary fears, but both easing measures normally leads to rising stocks and this morning was no different. Asian trading this morning saw Hong Kong’s Hang Seng Index gain 0.35%, Australia’s S&P/ASX200 rise 0.53%, whilst Japan’s Nikkei 225 Index increased by 1.13%.

 

Later today, the Federal Reserve will announce its decision on the direction of benchmark interest rates and economic projections, including possible moves to stimulate the economy with Federal Reserve Chairman Ben Bernanke to give a press conference to discuss the monetary policy decision.