Will investors recognize that equity markets are inflated by central bank liquidity injections?
*Financial Times, by Peter Garnham, December 14, 2009
‘The dollar gave back strong early gains against the euro on Monday as news that Abu Dhabi had agreed to bail-out Dubai and allow it to pay its creditors boosted risk appetite.
Abu Dhabi said it was providing $10bn in funding to bail out its fellow emirate, enabling Dubai to settle $4.1bn in sukuk, or Islamic bond, obligations due on Monday.
The news weighed on haven demand for the US currency and helped stem a rally that saw the currency hit a two-month high against the euro in the wake of strong US retail sales and consumer confidence data at the end of last week.
‘Clearly this is good news for local markets and, to some extent, for risky assets around the world,’ said Paul Robinson at Barclays Capital.
However, he said the increase in risk aversion that the issue raised, combined with added scrutiny on the fiscal position of governments’ finances around the world, was unlikely to reverse completely.
‘It has served to remind investors that the liquidity injection from central banks, which has been so important to the equity market rally, is unable — and was never intended — to solve the structural issues facing the global economy,’ said Mr Robinson.”
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