Event Risk Remains Huge Despite Central Banks’ Intervention
By: Patrick Allen
Friday, 16 Sep 2011
There was talk of an event risk going into Thursday’s market open, and the speculation proved correct.
After UBS announced it had lost $2 billion due to an alleged rogue trader, the world’s major central banks stepped into the void created by the euro zone debt crisis.
The Federal Reserve and the European Central Bank, in co-ordination with the Bank of England, Swiss National Bank and Bank of Japan announced a plan to offer three-month dollar loans to commercial banks in order to avoid a liquidity crisis in the euro zone banking system.
The intervention, 24 hours before euro zone finance ministers met in Poland to discuss their next response to the Greek problem, boosted the euro and saw stocks in the euro zone’s troubled banks rise sharply, with the exception of UBS [UBS 11.80 0.39 (+3.42%) ].
The intervention brought much-needed relief to the market, according to John Higgins, a senior market economist at Capital Economics, but is no “silver bullet.”
“Of course, the demand for dollar funding in the euro zone is symptomatic of a broader liquidity squeeze,” Higgins wrote in a research note.