Markets have rallied because the Fed as well as the European Central bank have stopped short rates going immediately ??higher by lending to commercial banks that were short of cash.

People should remember this is a short term fix, not a permanent soluton to the undelying problems. Today there are still financial institutions counting their losses in debt markets. Those who cannot sell their debt??assets on to other banks can now borrow short term from the Fed or the ECB to tide them over, but they still in the end have to sort out their balance sheets and adjust to poor quality debt being valued at a lower price.

The Central Banks have not yet signalled they will cut interest rates soon, nor have they hinted at a change in their stated intention to raise rates (ECB/Bank of England) or keep them up (Fed). We need to watch carefully, to see the commercial??banks and funds work out their new asset and liability position based on a more realistic assessment of poor quality loans, and to see if and when the main central Banks change stance. When the Central banks decide banks and borrowers have been punished enough for the credit excesses of the last few years, then we might?? see a longer lasting change in market fortunes. In the meantime expect continuing turbulence, as markets need more information about actual and potential losses to be able to price in a?? more stable manner.

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