Markets and Investors Shrug Off ECB LTRO

The euro began climbing  this morning after strong demand in response to the European Central Bank’s first ever three-year refinancing operation, but slacked shortly after.

The ECB attempted to send a loud signal to  markets by offering to loan $641 billion to 523 euro-area banks in a massive three-year funding operation. If anything the ECB assured that European markets and currencies should be under control over the holiday season.

The funding move by the eurozone central bank, known as a longer-term refinancing operation, or LTRO, is open to lenders across the euro zone. The figure came in excess of market expectations of $408 billion. The loans run for three years.

A spokesperson with the European Central Bank‘s press office said that the central bank would not be releasing the names of the banks that applied for loans. Nor would it provide a breakdown of loans by euro-zone nation.

The LTRO operation was the first three-year funding operation undertaken by the central bank. The funds are borrowed at its average interest rate, which stands at 1%.

Having been already higher, the euro jumped to a session high of $1.3197 against the dollar immediately after the ECB’s announcement, before dropped back. In New York, the single currency was down 0.4 per cent on the day at $1.3026. Against sterling, the single currency was down 0.5 per cent at £0.8310.

European indexes added as much as 1.3% in the moments after the results of the ECB funding operation was released, but those gains all but disappeared.

Among the beneficiaries, Lloyds Banking Group PLC climbed 3.9% and RBS PLC gained 3.3% in London.

The FTSE 100 index rose 0.1% to 5,427.12, raised by bank stocks, but weighed by a 1.3% loss for BP PLC. The Stoxx Europe 600 index increased 0.1% to 238.90, following a 2% rise in the prior session, which was the biggest overall gain since Nov. 30.

French banks, BNP Paribas SA moved up2.7%, Credit Agricole climbed 1.6. The French CAC 40 index rose 0.3% to 3,063.13.

The German DAX 30 index moved up 0.3% to 5,866.28, prompted by a 3% rise for Commerzbank and a 2.7% rise for Deutsche Bank, Insurer Allianz rose 2.7%.

Sterling’s move higher was little influenced by minutes from the Bank of England’s December meeting.

The vote to leave policy on hold earlier this month was unanimous, but some members of the monetary policy committee noted that the fragile economic conditions, particularly in the labor market suggested “a further expansion of the asset purchase program might be warranted in due course”.

There was, however, equal uncertainty about inflation. The bank has consistently predicted a sharp fall in inflation in 2012, but there have been few signs so far that this will materialize.

Analysts played down hopes that the funds would help prop up euro-zone sovereign bond markets, despite the heavy demand, which was at the high end of the market’s expectations. All in all the markets ignored this move by the ECB, as the only beneficiaries seemed to have been the banks, but there still isn’t an overall plan to guide the eurozone out of the financial and debt crisis it is facing. Just a lot of banks bloated with money.

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