Markets were distinctly underwhelmed by “operation twist” but may be underestimating a recent and prospective shift in central bank policies:

• The Swiss National Bank has injected CHF220 billion into the domestic money market since the start of August, equivalent to 39% of Swiss annual GDP.

• Yen strength is likely to prompt Swiss-style action from the Japanese authorities – a surge in bank reserves this week suggests that a policy shift is under way.

• “Operation twist” is probably part one of Fed Chairman Bernanke’s ploy to launch QE3 by the backdoor, part two being the Fed / ECB dollar swap lending operations scheduled to begin on 12 October – these should boost the Fed’s balance sheet and US bank reserves.

• The Bank of England is on course to launch a further round of reserves-financed gilt purchases at its October meeting.

• Dramatic economic and financial deterioration in Euroland is likely to prompt a cut in ECB official interest rates in October along with further measures to support the banking system including the reintroduction of 12-month repos.

• Central banks in emerging economies are shifting focus from inflation control to supporting growth in response to G7 recession fears.

The increase in Japan has pushed G3 plus Swiss bank reserves to a new record in the latest week – see first chart.

A previous post suggested that a policy U-turn by the ECB would be required for a sustainable equity rally. The Dow Industrials index, meanwhile, is now close to the scheduled late October low of the “six-bear average” – second chart.