Support to equity and bond markets going into 2013?

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EU agreement on the European Central Bank’s role as single banking supervisor i.e. the first step towards banking union. The first priority is to finalise the legal framework and secure the support of the European Parliament. The ECB must then hire staff and decide on implementation. Supervision is unlikely to start earlier than April 2013 and will not be fully operational until March 2014. The ECB will regulate between 150 and 200 banks directly, mostly cross-border lenders and state-aided institutions, with powers to investigate all 6,000 banks if necessary.

This is just the first step to banking union and later on a resolution authority and fund to wind up failed banks would need to be created and deposit guarantee schemes coordinated to avoid bank runs. The exercise will take several years and will have to overcome potential opposition from the Eurosceptics e.g. the British. However, it is significant that Germany has publicly applauded the new proposals.

Around about the same time that the EU announcement came out, the US Federal Reserve announced the expansion of its quantitative easing programme (QE4) and indicated that US interest rates will not rise, at the earliest, until US unemployment falls below 6.5m, provided that it expects inflation to stay below 2.5% for the following 1-2 years.

In addition, the Fed announced an extension of its bond-buying programme. The current $40b per month programme of mortgage-backed securities purchases will continue and an additional $45b per month of US Treasury purchases will begin. This action should help keep a lid on bond yields and assist the markets in the re-pricing of short term rates.

These two important initiatives should provide some festive cheer for equity and bond markets.”

However as with all investments, experienced independent financial adviser should be consulted

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