To understand what is in the foreground for the market this morning, we must first provide some quick background.

The S&P 500 eked out a 0.2% gain yesterday in mixed trade.  Shortly after the close, S&P announced it was lowering its ratings for 37 U.S. banks based on its revised rating system.  That headline pressured the S&P futures, which traded lower in overnight action. 

At the same time, China's Shanghai Composite dropped 3.3%, reportedly on concerns China would suffer a hard landing.  Separately, there were rumors that Italy has been discussing an aid package with the IMF.  Those rumors were denied.

Per usual, there were a lot of foreboding headlines about the eurozone debt crisis that created a sense the equity market might find it difficult to sustain this week's gains.

Now, back to the foreground.

The S&P futures are currently UP 37 points.  There have been two triggers for the bullish reversal this morning, both of which have been pulled by central banks:

1. The People's Bank of China (PBOC) surprised market participants with an announcement that it is lowering the required reserve ratio for its commercial banks by 50 bps to 21.0%.
2. The Federal Reserve, along with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank, announced coordinated actions to enhance their capacity to provide liquidity support to the global financial system.

A report of "coordinated action" by leading central banks is all traders needed to hear.  The S&P futures, which were up 8 points in response to the news from the PBOC (and more than 20 points off their overnight lows), were soon up 30 points.

For good measure, the ADP Employment Change report for November was much better than expected.  Specifically, it showed 206,000 private sector jobs were added in November versus an upwardly revised 130,000 in October and the Briefing.com consensus estimate of 125,000.

The ADP number is an encouraging indication ahead of Friday's nonfarm payrolls report.  It seems likely that economists will be taking their estimates higher in the wake of the ADP report.  At the moment, the Briefing.com consensus estimate for nonfarm private payrolls stands at 110,000.

In other economic news, Q3 Productivity was revised down to 2.3% (from 3.1%) and unit labor costs were said to be down 2.5% versus a previously reported decline of 2.4%.   With only a month remaining in the fourth quarter, these numbers have too much of a dated feel to them to draw much attention.

Then again, all else is being overshadowed at the moment by the central bank action.  As part of the coordinated action, pricing on existing temporary U.S. dollar liquidity swap arrangements will be lowered by 50 bps so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 bps.  Also, the central banks have agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions warrant.

This is a ringfence maneuver by these leading central banks, which are aiming to protect the functionality of the financial system in the face of increasing worries about the eurozone's debt crisis and the difficulties in crafting credible fiscal solutions to deal with it.

The coordinated approach is reminiscent of the group effort forged during the 2008 financial crisis.  Things of course got worse then before they got better. 

The latter understanding might be a source of concern in and of itself, but a recollection of the eventual rally that took place in the equity market beginning in March 2009 seems to be winning out in terms of the response we are seeing today.

--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.