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Mixed reception to record ECB lending

Banking stocks led the European markets higher this morning, positive sentiment apparently continuing from yesterday’s German and US data, as well as a surprisingly successful Spanish bond auction. The euro matched the 0.5% gains seen on most indices. There was some disappointment for the UK and although it didn’t necessarily show on the FTSE, investors learnt that our triple-A credit rating was in jeopardy due to the ongoing eurozone crisis, perhaps something that was already well appreciated by the market. Further, Gfk Consumer Confidence indicated that British morale was almost at a three year low.

There was expected to be significant demand for the ECB’s first ever tender of three year loans today, an offering that was announced prior to the EU summit as a measure to prevent a 2008 style credit crunch. The lengthy and cheap terms of the loans, which could be taken out for an unlimited amount, were designed to improve confidence in the continents financial institutions and encourage them to buy the sovereign debt of struggling peripheral economies. We heard in late morning that central bank lent €489 billion, something which equity markets and the euro initially took very well as there has previously been concern that the stigma attached may limit institutional uptake. Equity market and the euro jumped on the news. The optimism that this brought was however short lived and markets turned negative after the realisation that this highlighted the extreme stresses within the European banking system. Evidence that banks felt they had to rely on ECB loans hinted towards a pretty dire funding situation for the regions banks. Others did however question this theory, stating that for banks whose open market funding costs are around 4%, a 1% loan offering would be too good an opportunity to give up not matter what position they were in.

Banks were amongst the biggest gainers with Lloyds up 5.6% on a market that eventually closed down 0.6% at 5389.74. This was in line with the losses seen on the major indices of the US and Europe.

This was posted in Bdaily's Members' News section by John Dance .