All eyes on euro zone as global markets head south

The negative news concerned pressure from the euro zone on the euro and global stock markets. The chief worry was Greece’s threatened exit from the EU and the high possibility of debt default, as the second tranche of aid, ¤8 billion (Bt333 billion) from the EU and IMF, remained on hold.
    The gloom deepened when two French banks considered overexposed to debt-hit countries were downgraded by Moody’s, and Italy’s sovereign credit rating was put on negative watch.
    Although Europe’s policymakers have been scrabbling to come up with a rescue plan, they have as yet been unable to restore investors’ confidence by offering a signal of positive development to the global market.
Last week, the focus turned to the US and the Federal Open Market Committee (FOMC) meeting, which was held on Wednesday and Thursday. But market confidence was dealt a further blow, dropping 6 per cent in just 24 hours, after the US Federal Reserve used the meeting to announce it would not be expanding the size of its balance sheet.
     US policymakers now face the challenge of maintaining the inflation level while at the same time injecting more money into the US economy in order to stimulate growth.
In June, the FED ended its second programme of quantitative easing (QE2), aimed at boosting the economy by buying back approximately $600 billion in its own bonds.
This however failed to achieve its goal. Data showed the US economy grew at a slow pace with a high jobless rate in the first half of this year.
As markets had widely expected, the Fed last week announced its so-called Operation Twist, a plan to sell short-term Treasury debt and then purchase longer-term Treasury bonds – a repeat of measures used in the last recession in 1961. This tool is intended to help the Fed flatten the Treasury bond yield curve, lowering long-term interest rates and enhancing growth via a relatively higher rate of return that will attract foreign investments.
US Treasury bonds have rallied ferociously in the wake of Operation Twist, but the continuing policy crisis over sovereign debt in Europe is still dragging down the stock markets. All eyes are back on the euro zone.

Duangkamon Phunkaew works in the Treasury Division of Bangkok Bank.