The U.S. equity market enjoyed some kind of rally on Wednesday, as animal spirits were running high in response to the news that the Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank would be carrying out a coordinated action to enhance their capacity to provide liquidity support to the global financial system.

The S&P 500 surged 4.3% while the Russell 2000 jumped 5.9%. 

The aforementioned action was the primary catalyst for Wednesday's rally, though it would be remiss not to add that a surprise decision by the People's Bank of China to cut its required reserve ratio for commercial lenders by 50 bps and much stronger than expected ADP Employment, Chicago PMI, and Pending Home Sales reports in the U.S. provided additional fuel for the rally. 

Suffice it to say, Thanksgiving came late for a number of investors who had been staring at large November losses less than a week ago.  The S&P 500 was down 7.5% for the month last Friday.  After this week's rally, though, it ended November down just 0.5%.

We were not surprised that there was such a strong response to the coordinated action.  Similar responses have been seen on past announcements of coordinated liquidity support (see September 18, 2008, and May 10, 2010).  An important point not to be overlooked is that the market's enthusiasm for such action was short-lived.

No two periods are identical, so it is possible that things will be different this time, although it seems the enthusiasm over this coordinated action can only go so far as the eurozone bond markets will allow it to.

Remember, this action is intended to boost liquidity to keep the financial system functioning properly. It is not a fiscal solution, which is what is truly needed to keep the central banks from having to implement these extraordinary liquidity swap arrangements.

If the eurozone's problems were only liquidity problems, the coordinated action would have a silver bullet edge to it. Alas, there are solvency issues in the eurozone and they remain unsolved.

Should we see sovereign bond yields spike again in due time, particularly in Italy, Spain, and Germany, the rally off of the coordinated action will likely be short-lived. On the other hand, if some extraordinary (and credible) plan for spurring economic growth and/or preventing a run on the eurozone bond markets (e.g., ECB intervention, IMF credit line) is presented, then there should be a strong floor of support under the equity markets.

At the moment, the Federal Reserve and other central banks are doing what they can to provide liquidity support. That is clear with this announcement of coordinated action and it has undoubtedly left short sellers on edge.

The experience of recent years has shown, though, that coordinated central bank action is mostly a stopgap for markets undone by an inability to solve fiscal problems.  It stops the internal bleeding, but it does not fix what is broken on the outside.

On a related note, sovereign bond yields in the eurozone are backing down today in a good way following bond auctions in Spain and France that were met with strong demand.   Yields were higher for Spain than the previous auction, but that wasn't a surprise; meanwhile France actually saw an average yield on its 10-year note of 3.18% that was below the prior auction, which had an average yield of 3.25%.

There hasn't been much buying follow through in Europe, which also rallied strongly yesterday, yet these bond auctions have been a steadying influence in the face of another reminder from ECB President Draghi that the bond buying by the ECB is temporary and limited.

Separately, there are reports this morning suggesting Germany is warming up to the idea of boosting the IMF's resources.  Chancellor Merkel is expected to lay out Germany's vision for EU reform efforts in a speech tomorrow, meaning all other related headlines should probably be seen as subordinant headlines for the time being.

Currently, the S&P futures are trading 0.3% below fair value, so the cash market is expected to start on a slightly lower note with some profit taking to be expected after yesterday's strong rally. 

A contraction in China's PMI to 49.0 in November (vs. 50.4 in October) and a slightly weaker than expected initial claims report have contributed to the early indication.

Initial claims for the week ending November 26 increased 6,000 to 402,000 (Briefing.com consensus 390,000) while continuing claims for the week ending November 19 increased 35,000 to 3.740 mln (Briefing.com consensus 3.650 mln).  This data will not have any bearing on tomorrow's nonfarm payrolls report. 

The ISM Index for November (Briefing.com consensus 51.0; prior 50.8) will be released at 10:00 a.m. ET and could provide some added market-moving influence in light of the contractionary PMI number out of China.

--Patrick J. O'Hare, Briefing.com

Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial, please email researchsales@briefing.com.