U.S. equity markets rallied all five days last week, bolstered in part by news that five of the world’s central banks would provide dollar-denominated loans to the European Central Bank, which would then lend the dollars to Europe’s banks.

The move lifted—for now—the threat that European banks would have liquidity issues. The Dow Jones Industrial Average gained 4.7% on the week, or 516.96 points, to catapult over the 11,000 threshold to 11,509. Nasdaq enjoyed the largest improvement, jumping 6.25% to end the five days at 2622.31.

News of the central-bank support for Europe fueled a rally in financial shares both domestically and in Europe. JPMorgan Chase (ticker: JPM) rose 4% and Citigroup (C) added 8%. Europe’s banks improved the most, with Deutsche Bank (D shares gaining 12% and Credit Suisse Group (CS) tacking on 14%. The exception to the rule: UBS (UBS), whose shares were flat on the week after news that a trader lost $2 billion of the firm’s capital on trades gone wrong.

But the gains—both in bank stocks and the broader market—may be short-lived. The liquidity the central banks are providing Europe doesn’t make Greece any less indebted nor does it take loans to the PIIGS (Portugal, Ireland, Italy, Greece and Spain) off of European bank balance sheets. The central banks “pushed the problem out into early next year,” says Wayne Nordberg, head of New York City-based Hollow Brook Associates. “The only way you can solve the problem is to write off the bad debts.”

His forecast: The stock market will continue to fall as the European drama plays out, as earnings estimates get cut and as the political drama in the U.S. unfolds.
More immediately, the Federal Reserve Open Market Committee will meet this week, and is expected to announce Operation Twist—the purchase of longer-dated Treasuries to bring long-term interest rates down further (Source: Barrons Online).