Stocks jump as investors see central bank support

Stocks rose on Tuesday. The S&P 500 jumped 2.0 percent while the STOXX Europe 600 surged 2.1 percent.

Stocks rose amid reports that the European Central Bank is considering buying corporate bonds on the secondary market beginning early next year.

Also boosting markets was a report that US existing home sales rose 2.4 percent to the highest level in a year.

Nevertheless, many think that central bank actions -- or at least words -- remain key to market direction. From Bloomberg on Tuesday:

The central-bank put lives on.

Policy makers deny its existence, yet investors still reckon that whenever stocks and other risk assets take a tumble, the authorities will be there with calming words or economic stimulus to ensure the losses are limited...

Last week as markets swooned again, it was St. Louis Federal Reserve President James Bullard and Bank of England Chief Economist Andrew Haldane who did the trick. Bullard said the Fed should consider delaying the end of its bond-purchase program to halt a decline in inflation expectations, while Haldane said he’s less likely to vote for a U.K. rate increase than three months ago.

But some think that it takes more than mere words to hold up markets.

Matt King, global head of credit strategy at Citigroup Inc., and colleagues have put a price on how much liquidity central banks need to provide each quarter to stop markets from sliding.

By estimating that zero stimulus would be consistent with a 10 percent quarterly drop in equities, they calculate it takes around $200 billion from central banks each quarter to keep markets from selling off.

There may be good news though for stocks.

The good news for investors in the eyes of Citigroup is that although the Fed is still reversing and set to end its bond-buying this month, the European Central Bank and Bank of Japan will more than compensate with more stimulus in coming months.