Stimulus hopes spark global rally...But ECB, Bernanke disappoint

Global markets witnessed a secular rally, as investors bet on coordinated action from policymakers, including central banks, to try and turn around the sagging fortunes of the global economy. Investors resumed their risky bets on hopes that the ECB and Federal Reserve will unveil fresh monetary stimulus to mitigate the impact from the simmering eurozone debt crisis. The ‘risk-on’ rally came in the aftermath of a downbeat report on new job additions in the US, raising expectations of QE3 from the Fed. The Group of Seven (G-7) leaders held a tele-conference to discuss the ongoing troubles in Europe. However, they didn’t come up with any new measures to dispel the atmosphere of gloom. Economic statistics from Europe continued to be disappointing while widely tracked service sector readings in the US and China showed some promise. Meanwhile, Spain sent a distress signal about the impact of the country's banking crisis on government borrowing, saying Madrid was losing access to credit markets at current rates. It urged Europe to help revive its troubled banks. The debt-ridden Spain still managed to meet its target for debt auction rather comfortably, sending yields on its 10-year benchmark sovereign bonds lower. That didn’t prevent Fitch Ratings from cutting Spain’s credit rating by three notches. Spanish officials could make a request for outside aid for its troubled banking sector as soon as this weekend, according to media reports. Separately, Moody's Investors Service downgraded the credit ratings of several German banks, citing increased risk of further shocks emanating from the eurozone debt crisis and their limited loss-absorption capacity. The European Central Bank (ECB) President Mario Draghi said that officials stand ready to act as the euro region’s growth outlook worsens. Draghi stressed the limitations of his current policy tools, from standard interest-rate cuts to bond-buying and liquidity injections (LTRO). Draghi also questioned the effectiveness of cutting rates further and flooding financial market with even more liquidity (LTRO). He said ECB’s main job is to ensure stable prices. Across the Atlantic, Draghi’s counterpart in the US, the Federal Reserve Chairman Ben S. Bernanke too refused to oblige the markets by not committing to a QE3. He told the Congress that the US central bank stands ready to act, but gave no indication that additional easing is imminent. Bernanke’s rebuff soured the sentiment globally, with investors reversing of the risky bets taken earlier in the week. Even China’s surprise rate cut failed to propel the markets higher on Friday. Next weekend will be critical for the global markets as the beleaguered Greece holds another election. It has been billed as a 'make-or-break' election for Greece. The outcome may well decide the debt-stricken country’s fate within the euro currency bloc. Hence, it pays to be cautious and wait till the important events lined up for this month pass by. Markets will also pay attention to important set of Chinese data due to be released on Saturday. For India, the next big event is on June 18, when the RBI will take a call on interest rates. Expectations of a 25-bps cut in the repo rate have been building ever since the Government released the dismal Q4 GDP data. A steep drop in global commodities, especially crude oil, has given some elbow room to the RBI to try and stimulate the sliding Indian economy. Markets will surely be disappointed if the RBI maintains a status quo on rates.