Central bank liquidity tap to stay open

Sun Feb 5, 2012 3:07am EST
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By Richard Hubbard

LONDON (Reuters) - After a blockbuster January for both equities and bonds - rallies that caught many in the market by surprise - investors will be paying keen attention to the world's central banks in the coming week for signs of continued easy money.

They will also be closely watching negotiations over a second bailout deal for Greece, while Chinese data on trade and inflation and a heavy week of corporate earnings all lie ahead.

Investors are having to adjust quickly to signs that global economic growth, though very fragile, may be turning out to be better than many had thought likely.

"We expected the equity market to weaken in Q1 before staging a strong recovery around Q2 at the weakest point of the economic cycle," said Peter Oppenheimer, chief global equities strategist at Goldman Sachs.

"We have been wrong so far," he said, adding that significant headwinds remain, and corporate profits and activity are likely to be stagnant at best.

The European Central Bank, the Bank of England and the Reserve Bank of Australia all hold policy meetings during the week, on the heels of the U.S. Federal Reserve's commitment to keep rates on hold until the end of 2014 at the earliest.

Tighter financial conditions as banks and households continue to shed debt are expected to keep policymakers on an easier footing despite the improvement in economic data and an easing up of the euro zone debt crisis.

The improved data was itself brought on by a large influx of low interest three-year loans from the ECB.   Continued...

<p>The Euro sculpture is pictured in front of the headquarters of the European Central Bank (ECB) in Frankfurt January 24, 2012. REUTERS/Lmar Niazman</p>