Markets rally as central banks go into action

Markets surged on Wednesday, with the S&P 500 rising 4.3 percent and the STOXX Europe 600 rising 3.6 percent.

The rally in markets occurred after the world's major central banks went into action on Wednesday.

From Reuters:

The U.S. Federal Reserve, the European Central Bank and the central banks of Canada, Britain, Japan and Switzerland said in a joint statement they had agreed to lower the cost of existing dollar swap lines by 50 basis points from December 5.

Other measures included setting up bilateral swap arrangements between the central banks so that any bank could tap additional liquidity in their own currencies if necessary. The swap arrangements are good through Feb 1, 2013.

Earlier in the day, the People's Bank of China had announced that it would reduce the reserve requirement ratio for banks by 50 basis points.

The surge on Wednesday took markets further away from the year's lows that they had been driving towards last week. However, Brendan Conway and Steven Russolillo at MarketBeat warns the bulls not to get too comfortable.

Central-bank interventions like Wednesday’s move ... have a record of jolting stocks higher... But the underlying, and usually troubling, reasons for the banks’ actions tend to trump the action itself in the long run.

For example, the Federal Reserve triggered a series of sharp, brief stock-market rallies with its newly aggressive posture in late 2007 and most of 2008. The central bank cut the fed funds rate from 5.25% to a range of zero to 0.25% over the span of Sept. 18, 2007 to Dec. 16, 2008, with stocks chopping higher before reversing with even bigger drops.

Indeed, eurozone economic data on Wednesday gave further reasons for caution. Inflation remained at a three-year high of 3.0 percent in November while the unemployment rate rose to 10.3 percent in October, the highest in more than 13 years.

Economic data were somewhat better elsewhere though.

In the US, a report from ADP Employer Services showed that private employment increased 206,000 this month, the Institute for Supply Management-Chicago Inc’s business barometer increased to 62.6 in November from 58.4 in October and pending home sales increased 10.4 percent in October.

Canada's economy grew at a 3.5 percent annualized pace in the third quarter, rebounding after a 0.5 percent contraction in the previous quarter.

In Japan, industrial production rose 2.4 percent in October. However, the Markit/JMMA Japan Manufacturing PMI fell to 49.1 in November from 50.6 in October.