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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (35036)	12/11/1999 9:21:00 AM
From: Les H	Respond to of 99985

ANALYSIS-Central banks lend markets yearend cheer By James Saft LONDON, Dec 10 (Reuters) - Generous streams of central bank created liquidity and a host of measures designed to avoid a millennial credit crunch have helped to underwrite the striking yearend global financial market rally of 1999. Gains in Internet and technology shares have helped push pan-European shares up by ten percent since the beginning of November, while the tech-heavy U.S. Nasdaq has risen 20 percent in the same period and some seven percent in December. But far from being just dot.com mania, rallies in instruments such as emerging market and corporate bonds indicate that most classes of investors are hungry to take on risk. Malcolm Roberts, of Crossborder Capital in London, said that the high level of global central bank liquidity is at least partly responsible for the rally. ``The Bank of Japan has once again been injecting huge amounts into the money markets and the southeast Asian central banks have been hugely expansionary,' Roberts said. ``The liquidity suggests a positive climate for financial assets generally globally and it is one source of liquidity which is flowing into equities.' Crossborder said its own central bank liquidity barometer stood at 67 at the end of November, the most recent period for which figures are available. A reading of 50 is considered normal, with anything above expansionary. Central bank-created money market liquidity, which is distinct from interest-rate policy, has a strong effect on the behaviour of financial markets and on investors' appetite for risk. Central banks have taken steps to ensure sufficient liquidity is available to market players around the turn of the millennium. The U.S. Federal Reserve, Bank of England and European Central Bank have variously expanded the eligible pool of collateral for repurchase (repo) transactions or eased terms for discount window loans. The U.S. Fed has also extended securities repos from 60 days to 90 days and issued ``liquidity options.' This ``provides incentive to take on extra risk,' said Roberts.``There has been a transfer of market risk into central bank risk.' LEVERAGED FUNDS, TRADERS SEEN BACK IN FORCE Also lending strength to the various rallies is the return of bank proprietary traders and leveraged investors such as hedge funds, according to some fund managers. Hedge funds and bank proprietary desks were largely reined in in the wake of expensive losses in 1998 and the Long-Term Capital Management debacle. ``You have had an appetite for risk taking, monetisation by the Japanese might be one factor, and the banking sector is liquid,' said Michael Hughes, of Baring Asset Management in London. ``Part of it is pure Internet speculation, but also driven by the fact that people have made so much already that they can afford to take risks.' Investment banks, which kept their proprietary traders largely in check earlier this year, have loosened the leash since the beginning of November, fund managers said. Roberts of Crossborder thinks the early part of next year may prove difficult for financial markets as central bank liquidity ebbs and millennium measures expire. Fund managers agreed: ``The markets next year will do what they do after a new year's rally, which is consolidate for a while,' said Michael Lenhoff, global strategist at fund manager Capel-Cure Sharpe. Markets ``will return to worrying about the same old things: which central bank will tighten next and what the profile of corporate earnings will be.' >>>Look at the bright side, next December is also a millenium change.