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THE DIFFERENCES BETWEEN THE ECB AND THE FED IN CRISIS MANAGEMENT

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By Charis Mountis, Head of Dealing at ForexTime Limited

Since the latest financial crisis hit the global economy in 2008, central banks around the world have been trying to manage the situation and minimize its impact on their economies. Although financial crises tend to manifest in similar ways everywhere (high unemployment rates, low consumer spending, drop in GDP), the measures used by central banks to deal with such crises can vary widely. The central banks responsible for handling two of the world’s largest economies, the Federal Reserve (or “the Fed”) in the U.S. and the European Central Bank (ECB) in the European Union, appear to follow distinctly different monetary policies that employ diverse financial controls to manage crises.

fxtmHow Central Banks Work

A central bank is the authority responsible for a country’s monetary policy and the only issuer of printed bank notes and minted coins in an economy.The main purpose of a central bank is to manage the stability of its currency by controlling inflation through the supply of money in circulation. For this reason, when a crisis strikes and commercial banks cannot cover the shortage in supply, they turn to the country’s central bank for additional funds.The central bank must somehow provide these funds in order to keep the banking system from failing.

Buying vs. Lending

The main difference between the Fed and the ECB is that in periods of crisis the Fed buys U.S. government treasury bonds (treasuries), while the ECB lends money to governments and commercial banks in European Member States. The Fed buys treasuries that have varying maturities, and are purchased with an agreement to be repurchased at the end of the maturity period. The loans granted by the ECB are generally short term (up to three months) and are secured by collateral. When the loan period expires, the banks have to pay the money back to the ECB.

The Fed in Crisis: Quantitative Easing

The Federal Reserve’s main response to the latest crisis that began in 2008 has been to increase liquidity in the market through large-scale asset purchases. Also known as Quantitative Easing (QE), these purchases pumped cash into the market at a rate equivalent to 20-25 percent of the country’s GDP. After the main crisis was over, the Fed announced the tapering of its monetary policy in December 2013, and has been slowly reducing its monthly purchases on the back of improved economic performance.

Charis Mountis

Charis Mountis

The ECB in Crisis: Extended Maturities and the SMP

The ECB’s main concern in dealing with the latest crisis has also been to ensure liquidity, as well as to repair its lending system to commercial banks. The ECB changed its regular monetary policy by increasing the maturity of its bank loans from three months to six months initially, and later to a year, and even three years. These loans have been made available on a full-allotment basis, meaning that banks have unlimited access to the liquidity of the central bank, when providing adequate collateral. Requirements on collateral, moreover, have been eased several times, giving commercial banks in Europe easier access to the ECB’s reserve money.

In 2010, when Greece suffered a major financial hit, the ECB introduced the Securities Markets Programme (SMP) and intervened by buying Greek bonds.The programme had increased to also include purchases of Spanish and Italian bonds up until its termination in September, 2012.The ECB justified the creation of the SMP through the need to ensure financial stability in the Eurozone.

Most recently, the ECB started its own aggressive Quantitative Easing programme. After launching the Banking Union, designed to coordinate monetary policy in a more cohesive way within the EU, it committed to buying 60 billion euros worth of government bonds per month. The European Central Bank also introduced negative interest rates as a way to encourage banks to lend and boost the economy, instead of keeping their cash stockpiled.

Are the two central banks coming closer in their crisis management? It would appear so with the ECB’s QE programme, but the two markets are very different in nature and it remains to be seen whether QE will work as well in the diverse European Union environment as it did in the United States.

Disclaimer:The content in this article comprises personal opinions and ideas and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime Ltd, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

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Energy stocks drag down FTSE 100, IG Group slides

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Energy stocks drag down FTSE 100, IG Group slides 1

By Shivani Kumaresan

(Reuters) – London’s FTSE 100 slipped on Thursday, weighed down by falls in energy stocks as oil prices slid after a surprise increase in U.S. crude inventories, while IG Group tumbled on plans to buy U.S. trading platform tastytrade for $1 billion.

The blue-chip FTSE 100 index lost 0.4%, while the domestically focussed mid-cap FTSE 250 index also slid 0.4%.

Energy majors BP and Royal Dutch Shell fell 3.2% and 2.5%, respectively, and were the biggest drags on the FTSE-100 index. [O/R]

“What is holding back the UK is a lack of tech stocks to capture the ‘rotation’ back into tech seen since Netflix results,” said Chris Beauchamp, chief market analyst at IG.

“Stock markets overall are much quieter today, looking so far in vain for a new catalyst for further upside.”

The FTSE 100 shed 14.3% in value last year, its worst performance since a 31% plunge in 2008 and underperforming its European peers by a wide margin, as pandemic-driven lockdowns battered the economy and led to mass layoffs.

British Prime Minister Boris Johnson said it was too early to say when the national coronavirus lockdown in England would end, as daily deaths from COVID-19 reach new highs and hospitals become increasingly stretched.

IG Group tumbled 8.5% after announcing plans to buy tastytrade, venturing into North America after a stellar year for the new breed of retail investment brokerages.

Ibstock jumped 7.3% to the top of the FTSE 250 after the company said fourth-quarter activity benefited from better-than-expected demand for new houses and repairs.

Pets at Home Group Plc rose 2.2% after reporting an 18% jump in third-quarter revenue, boosted by higher demand for its accessories and veterinary services as more people adopted pets during lockdowns.

(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V and Mark Potter)

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Wall Street bounce, upbeat earnings lift European stocks

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Wall Street bounce, upbeat earnings lift European stocks 2

By Amal S and Sruthi Shankar

(Reuters) – European stocks rose on Wednesday after Dutch chip equipment maker ASML and Swiss luxury group Richemont gave encouraging earnings updates, while investors hoped for a large U.S. stimulus plan as Joe Biden was sworn in as president.

The pan-European STOXX 600 index closed 0.7% higher, getting an extra boost as Wall Street marked record highs.

All eyes were on Biden’s inauguration as the 46th U.S. President, with traders betting on a bigger pandemic relief plan and higher infrastructure spending under the new administration to boost the pandemic-stricken economy.

Tech stocks rallied to a two-decade peak in Europe after ASML Holding NV rose 3.0% to all-time highs on better-than-expected quarterly sales and a strong order intake for 2021.

Meanwhile, Richemont rose 2.8%, after posting a 5% increase in quarterly sales as Chinese splashed out on Cartier, its flagship jewellery brand.

Britain’s Burberry jumped 3.9% after it stuck to its full-year goals, saying higher full-price sales would boost annual margins, while Asian demand remained strong.

The pair boosted European luxury goods makers that are heavily reliant on China, with LVMH and Kering gaining between 1% and 3%.

“Any sign that retail spending is picking up in China is going to be a boost to the Western markets and those heavily exposed to it,” said Connor Campbell, financial analyst at SpreadEx.

The European Central Bank is set to meet on Thursday. While no policy changes are expected, the bank could face more questions about an increasingly challenging outlook only a month after it unleashed fresh stimulus to bolster the euro zone economy.

“With the new round of easing measures fully in place and no new forecasts to be presented tomorrow, it should be a fairly uneventful day for the euro,” ING analysts said in a note.

Italy’s FTSE MIB gained 0.9% and lenders rose 1.6% after Prime Minister Giuseppe Conte won a confidence vote in the upper house Senate and averted a government collapse.

Conte narrowly secured the vote on Tuesday, allowing him to remain in office after a junior partner quit his coalition last week in the midst of the COVID-19 pandemic.

Daimler AG jumped 4.2% after its Mercedes-Benz brand unveiled a new electric compact SUV, the EQA, as part of plans to take on rival Tesla Inc.

Germany’s Hugo Boss added 4.4% after Mike Ashley-led Frasers said it boosted its stake in the company.

(Reporting by Sruthi Shankar and Amal S in Bengaluru; Editing by Shailesh Kuber and Arun Koyyur and Kirsten Donovan)

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Miners lead FTSE 100 higher on earnings cheer

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Miners lead FTSE 100 higher on earnings cheer 3

By Shivani Kumaresan

(Reuters) – UK’s FTSE 100 rose on Wednesday as miners gained after a strong production forecast from BHP Group, while encouraging updates from luxury brand Burberry and education group Pearson drove optimism about the earnings season.

BHP Group Ltd climbed 2.8% after it forecast record iron ore production for fiscal 2021, helped by high prices for the commodity. Other miners Rio Tinto, Anglo American and Glencore rose more than 2%.

Global markets rallied in anticipation of more fiscal spending as Joe Biden prepared to take charge as the 46th U.S. president.

“There is a view in the markets that more spending is in the pipeline, after all, Mr Biden will want to start his presidency on a positive note,” said David Madden, market analyst at CMC Markets UK.

The FTSE 100 index rose 0.4% and the domestically focussed FTSE 250 index added 1.4%.

The FTSE 100 has recorded consistent monthly gains since November after the sealing of a Brexit trade deal and hopes of a vaccine-led economic recovery, but has recently lost steam as tighter business restrictions sparked fears of a slow rebound.

Burberry rose 3.9% as it stuck to its full-year goals and said higher full-price sales would boost annual margins and Asian demand remained strong.

Global education group Pearson jumped 8.6% after its global online sales grew 18% in 2020, helped by strong enrolments in virtual schools.

WH Smith Plc surged 10.4% to the top of the FTSE 250 index as its trading during Christmas was ahead of its expectations.

(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V, William Maclean)

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